I never punish for reading. (ever). DD10 will stay up until close to midnight on some nights reading (bedtime is 9:00) and I let the fatigue she feels in the early mornings be a natural consequence.

I go a little to the extreme, actually... like if she's supposed to be doing something else, like cleaning her room (sigh), and I catch her reading instead, I let it go. Reading is like a free pass.

I'm probably a little too book friendly, but it's an activity I really value that I think will help her in the long run.