Kolasinac signed from Schalke in 2017 and will return to the Bundesliga club who sit at the bottom of the league table amid a winless run of 28 matches.
The 27-year-old has only made one Premier League appearance this season and was used mainly in cup competitions such as the Europa League and League Cup. The loan deal is subject to the completion of legal and regulatory processes and is effective from Jan. 4.
"Sead needs to be playing regularly, so we have decided together that a move back to Germany with Schalke will benefit him at this moment," Arsenal technical director Edu said in a statement.
"We will be keeping in close contact with Sead, and wish him huge success for the remainder of the season with Schalke."
Meanwhile, Arsenal boss Mikel Arteta has said that more players are likely to leave on loan as they aim to trim their large squad.
"There are a lot of players that are going to go on loan... that's the priority at the moment because we cannot sustain the numbers that we have in certain positions," Arteta told a news conference before the transfer was announced.
"We're looking to do that. And then we will see if we have the right opportunities in the positions that we need some more help, we're working with the club to try to address them.
"We have had some conversations around a few players and whether we can find some loans."
Arteta also said there was no need for a temporary halt to the season after surging infections in the league led to a third match being called off on Wednesday.
Fulham requested their game at Tottenham Hotspur to be postponed due to an outbreak at the club, two days after Manchester City's game at Everton was also called off.
Arsenal travel to West Bromwich Albion on Saturday and manager Sam Allardyce wanted a pause in the season to act as a "circuit break."
However, Arteta, who contracted the virus in March, said the show must go on.
"All the protocols we have in place, everything we do around the training ground [and] matches, the fact that we play our game outside, it minimises the risk a lot," Arteta added.
"We're going to have more restrictions I think, we're going to have more tests to try to be as efficient as we were before and we will see. But I think it will work and I think we can carry on doing it."
Information from Reuters was also included in this report.