I split reading into levels. For me, it begins when the child can sound out/read a word without help(no assistance from someone else and no contextual clues, such as pictures). This is easy to determine: I write random words on a piece of paper. Can the child tell me what they say? If yes, reading has begun (I think of these kids as emerging readers).
Next come simple books (Bob books, Dr. Seuss, etc), and the process progresses from there. My eldest was pretty driven about reading. He didn't start until he was 4, but had got to Goosebumps chapter books sometime in kindergarten; Amazon says they're for ages 9-12. At that point, I thought of him as being pretty good but not yet literate.
I see literate when someone can accomplish things by reading. For example, can s/he follow the directions in a science kit without my help? Figure out a bus schedule? Use the index in a big book, find the relevant entry, and understand what's written? I see these skills as signs of basic literacy.
I also see two main stages in reading: the first is sounding out words of increasing complexity (ex. from cat to cave to volcano to excitation). Being able to understand increasingly longer sentences is also part of this stage to a degree.
Once my kids get proficient at this skill, their progress in reading seems to be tied to vocabulary. Which is to say, once they can sound out words without much trouble, reading skills become dependent on knowing what the words mean. This, I think, is why a lot of GT kids can race ahead of their peers so fast without help or extra work --- they're little vocabulary sponges.
My DS6 could sound out words when he was 3, but didn't have much interest. He's now at a point where he's tipping between sounding-out and benefiting from his large vocabulary. It's kind of trippy to give him a new book and watch him sound out a small word one minute and then whip through a complex sentence the next.
There people on this list who have kids who were reading books when they were 2 or 3! They might have a totally different perspective on this subject.
Val
