Kids at almost any age can absolutely tell the difference between real violence and game violence. I’m not sure about fake violence against real actors, we have avoided that for the his reason. But ultimately the power button on the TV is a pretty compelling gate.
My 3 year old is a pretty decent Titanfall player. If he starts getting excited or upset at the game it is never because he thinks something bad is happening, it’s because he is into it. He is only allowed to play for 15 minutes at a time though because of a overstimulation, which is a real thing, it makes him all high energy.
I think the key is to interrupt the gaming experience frequently with other things. For instance I will have him pause it and do some light chores, or stop playing and switch to an activity. You have to have games in the rotation, not let them be an exclusive activity. You also have to participate and lead a kid with your reactions and emotions to show them appropriate play. Of course some games are right out for content. No GTA ever.
To me gaming is just like anything else, it is just way more prone to obsession, so you have to check that. You also have to monitor your kid closely, filter, participate and explain.
There is one huge positive too: Games make them curious about subjects like everything else. AC: Origins (tomb raiding and exploration, not combat and missions) have gotten us on an ancient Egypt kick now, which he is learning about for the first time!