Imposing such sanctions would have cast a shadow over Xi's visit and created a diplomatic nightmare, an anonymous source close to the White House told Reuters.
Xi's high-profile visit will include a black tie state dinner at the White House hosted by President Barack Obama.
The decision came after an all-night meeting on Friday during which US and Chinese officials reached a "substantial agreement" on several cybersecurity issues, the Washington Post reported, citing an Obama administration official.
The paper quoted the official as saying sanctions were not off the table, and China's behavior in cyberspace is still an issue.
"But there is an agreement, and there are not going to be any sanctions" before Xi arrives on September 24, the official said.
The sanctions Washington was considering would not be imposed against suspected hackers of government data, but foreign citizens and firms believed to have committed cyber attacks against US commercial enterprises.
If taken, the action would be the administration's first use of an executive order signed by Obama in April to crack down on foreign hackers accused of penetrating US computer systems, Reuters reported.
In response to allegations of cyberespionage, the Chinese Foreign Ministry urged Washington to either provide a rationale for their claims – which officials have thus far failed to do – or cease with its warrantless accusations.