McDonald has played 17 games in his second season since being selected with pick No.4 in the 2020 NAB AFL Draft, but the West Australian has only kicked five goals in his past eight games and struggled to make an impact during this finals series.
"It's not easy, I've been on the other side of that conversation as a player. It's not an easy thing to do," Sydney coach John Longmire said.
"He is a terrific young player with a great future ahead of him. We made the decision because we thought that was the best line-up for tomorrow. Very tough for him, but he's a great kid and he will bounce back bigger and better."