The 19-year-old have impressed for the Royals in the Championship this season.
Karacan said: “It’s great to sign this new deal with Reading.
“I’m really happy with the progress I’ve made so far this season and I’m delighted to be in the team.
“Now it’s up to me to get my head down, keep working hard and hopefully prove to the manager that I am capable of doing a good enough job to keep my place.”
He added: “There are a few of us emerging from the Academy set-up here, to now make a real impression on the first team – and that can only be good for those boys coming through and for Reading Football Club.”
Royals director of football, Nick Hammond, said, “Jem thoroughly deserves this new contract and we are delighted that he has signed.
“He is now a fully established member of our first team squad, having played with great authority in the process of starting our last seven consecutive league games.
“He sets a great example of what can be achieved by young players coming through our Academy and seizing their opportunity, and we hope that a number of others will follow in his footsteps.”