This study examined 3- to 5-year-olds' (N = 128; 54% girls) ability to discriminate emotional fantasy and reality. Children viewed images depicting fantastic or real events that elicited several emotions, reported whether each event could occur, and rated their emotional reaction to the image. Children were also administered the Play Behavior Questionnaire and Pretend Action Tasks to assess play behaviors. Findings revealed age-related improvements in performance and biases in judgment based on the emotion depicted. Children reported that happy fantastic events could occur significantly more often than frightening and angry fantastic events and that happy real events could occur significantly more often than frightening and angry real events. Children's emotional reactions to the images but not play behaviors were significantly related to their fantasy-reality distinctions. Implications for the relation between emotions and children's fantasy-reality distinctions are discussed.