Speaking from a position of total ignorance, does Waterloo have contactless card readers on the gates for the Reading platforms?
If not, then in practice the answer will be 'no' in that there would be no way to validate your contactless card on leaving London (or arriving if coming from Reading).
And I suspect (again from a position of total ignorance) that even if there are readers, the answer is still 'no'; someone who already holds a ticket is being given an ad-hoc easement of what route they can use so that the railways can complete the existing contract for a journey from London to Reading; someone with a contactless card doesn't enter into a contract to travel until they go through the first barrier line so the railway doesn't have a commitment to fulfil until that point.
As I say, total ignorance speaking here, so I would love to be proved wrong!
And a further thought: for the specific example quoted, won't the slow Waterloo to Reading fare be cheaper than the fast Paddington fare? If so, surely 'ticket acceptance' charging the Paddington fare would cost the passenger more. Although it makes the question of what happens if the Waterloo line is blocked more interesting...