Injured players can be released. DL players cannot. That said, if it's before arb, he doesn't have to be on the DL. DL designations do NOT carry over at rollover.

I'd keep him, because:
1) He's a reasonable COF if his price stays down
2) He'll ask for a typical arb-1 salary next season-- but the season after that, when he doesn't play at all, he should just ask for the same salary he made in his arb-1 season.
3) So you'll get him for his arb-2 year at a manageable price, when he will presumably be able to play (how many days do you see him on the DL for? What I see is not reliable since I'm not in that world). At that point he'll have a playable price-value relationship, and you can play him or trade him as you see fit.

At rollover, he'll be removed from the DL (still injured though). At that point, just demote and put on minor DL...then service time isn't an issue.

Service time isn't counted when on the DL.