The decision sets the stage for a mental evaluation of Holmes that could take months.
Holmes is charged with multiple counts of murder and attempted murder for the shooting on July 20, 2012. Prosecutors are seeking the death penalty.
Prosecutors say Holmes spent months buying weapons, ammunition and materials for explosives and scouted the theater in advance. He donned police-style body armor, tossed a gas canister into the seats and opened fire, they say.
In court documents and hearings, attorneys had said that Holmes is mentally ill. He was seeing a psychiatrist before the mass shooting.
Colorado law defines insanity as the inability to distinguish right from wrong caused by a diseased or defective mind. If jurors find Holmes not guilty by reason of insanity, he would be committed indefinitely to the state mental hospital. He could eventually be released if doctors find his sanity has been restored, but that is considered unlikely.
If Holmes is convicted, the next step would be the penalty phase, during which both sides call witnesses to testify about factors that could affect why Holmes should or shouldn't be executed. If jurors decide on the death penalty, it would trigger court appeals and open other possibilities that would take years to resolve.
The Associated Press contributed to this report.