I doubt reality is a simulation at all. You have to assume that there is something that is not our universe, that has something analogous to simulation, and so on. It's not really a given thing like so many make it out to be where you could have billions of simulated universes, just one universe with rules like ours and the chain dies out very fast.

As for magic, what do you think science is? Back in the day they'd accuse people of magic for summoning fire, healing the ill, and all sorts of other stuff. Nowadays we do all those things regularly, and we know of a lot of things that look like magic, that could have been done back then, that are well explained by physical law. So, not really patched out, but more like how characters become OP when a new tactic is found with them, even if they had no stat changes.

As for if the community could handle being in a simulation well. I don't know about that, the community doesn't take the idea of being "less than absolutely real" very well.