The difference between real life and virtual life is the same as the difference between spiritual life and material life. Some people become so absorbed in their virtual life, that the think it is real. Similarly, we become so absorbed in our bodily and mental existence, that we think it is real. It is really a matter of absorption.
Those who are seers of the truth have concluded that of the non-existent [the material body] there is no endurance and of the eternal [the soul] there is no change. This they have concluded by studying the nature of both. (Bg. 2.16)
So according to Krishna's definition, reality is that which is eternal and unreality, or illusion, is that which is temporary. Note that illusion does exist, but it is unreal in the sense that it's not eternal.
Someone may object - if I smash my head into a wall, the pain I feel is very real. How can it not be real? But if seen in the light of eternity it is not real. For instance, I may break my leg today, but 10 years from now it will not be real, what to speak of 100 years from now. It will be as if it never happened.
So illusion exists, it is not false or fictional, but the reason it is not considered real is because it is not eternal. It's like a dream. A dream happens, but when we wake up, we understand it was not real. Life in a material body is like that - dream-like. Say, we have a real nice meal today, a week from now, it will be no more real to us than had it been a dream.
That’s how life in a material body is like a dream. We'll realize that, if not before, then at the time of death. Death will be a rude awakening for the atheist.
So reality and illusion are defined by time. One is eternal the other is temporary. And if you think about it, it makes sense. Anything seen in the light of eternity will be manifested for such a short flicker in time, that it is as if it didn't really happen.
Brahma, the god of creation, is said to live as long as the universe lasts - which is calculated to be 311 trillion solar years. So if you live for such an unfathomable length of time, then imagine what a person's life-span on earth of, say, 80 years must look like. I don't even live a second from Brahma's point of view. How real would a person be to you, if he existed for a second? Think about it.
If you take 80 years out of 311 trillion years it is such a miniscule portion of time, that for all practical purposes it might as well not have happened. But then again, if you take Brahma's lifespan and compare it to eternal time, it is just as little. However long time is taken out of eternal time, it will still amount to nothing.
The duration of the universe will make a lifespan on earth seem completely insignificant, and the cosmic time of millions, billions, and trillions of years will seem totally inconsequential and insignificant from the angle of eternal time. So in the light of eternity, anything that is not eternal is but an illusory glimpse. That's how one can understand that anything which has a beginning and an end is illusory. Only that which is eternal is real.
Now, in this world, what is then real, someone might ask. We don't have any experience of something that lasts forever, do we? Yes we do. The only thing, that lasts forever is the conscious self. The soul is eternal, so in the material world the only real thing is ourselves, our real selves, the soul, anything else, including our body and mind, is temporary, and thus illusory.
That's why self-realization, according to Vaishnava theology, means to realize one's eternal self beyond the temporary body and mind. Krishna gives a brilliant argument in the Bhagavad Gita to help a thoughtful person experience his eternal self.
A person's body goes through different stages of infancy, childhood, youth, old age and finally death. But during all these changes of the body and the mind, the self (the inner sense of I-feeling), or the inner observer remains constant. I am the same ‘me’ when I’m young as when I’m old. That's one way we can logically understand we are eternal.
The human life-form is unique in the sense that it allows the self to understand its own eternity. So the purpose of human life is to connect with the eternal self. If one is simply absorbed in the body and its demands, one is wasting this valuable opportunity - an opportunity that is only available in the human life-form. Eating, sleeping, mating and defending, the soul can do in any life-form, only in the human form can the self connect with eternity, ie. reality.
Never was there a time when I did not exist, nor you, nor all these kings; nor in the future shall any of us cease to be. (Bg 2.12)
As the embodied soul continuously passes, in this body, from boyhood to youth to old age, the soul similarly passes into another body at death. A sober person is not bewildered by such a change. (Bg 2.13)