I don't have an answer for when to consider your child a reader, but I just looked at some of my notes on DS4. When he was 2.5, he was big into signs of all kinds. He'd ask what they said once, then he knew them and would read them whenever he saw them. He loved road work because of all the signs!
He was a sneak reader, though. I knew he knew a lot of words, because I would catch him reading something occasionally, but he wouldn't read to us. He wanted to be read to, and still does. Just before his 4th birthday, he finally wanted to read to us. He read a kids science book "There's No Place Like Space" and Days with Frog and Toad, with no difficulty.
I worried about him not reading (and also fantasized about getting a little extra me time if he'd just start reading his own books!) So we started telling him he could have an extra bedtime book if he would read it to us. That worked for a bit, but now he just chooses short books for himself. He is now 4 3/4 yo, and still won't read to us, but in the past 6 months he has read pages of Harry Potter books, chapters of ramona books, and most recently pages of Time Warp Trio books. So he's come a long way in a short time. I've pretty much given up on the fantasy of extra me time, and i only have one kid. Good luck! Oh, I had another trick too, but that backfired. I read him a capt underpants book, and I hated it. I told him i'd get him some more, but they would be his to read because I wasn't going to read them. I forgot to mention this plan to DH, who ended up reading them to my little schemer...
I remember the magic tree house days - when DS was 3.5 we had to read one a day until the whole series was complete! ugh. I'm very glad I rediscovered the library, though. Without it, we would be in the poor(er)house with all the books we go through with DS! (i'm a recovering book-buying addict.)
Oh, and DS never really sounded out words. He's a memorizer. He's starting to learn to look at words in parts though, which helps him figure out bigger words he hasn't seen.
