Donaldson, who joined on a free transfer from Brentford last summer, has agreed a deal which could see him remain at St Andrew’s until June 2018.
The 31-year-old featured in all 46 of Birmingham’s league matches last season, scoring 16 goals.
Donaldson’s deal comes after 19-year-old midfielder Demarai Gray committed his future to the club by signing a new three-year contract earlier this month.
Birmingham director Panos Pavlakis recently revealed that agreeing new contracts with the club’s key players is a top priority for the board and manager Gary Rowett.
In an exclusive interview with BluesTV, he said: “We are in discussion with the manager about going ahead extending existing contracts.
“We want to build a solid team, a good bunch of lads. We want to keep them together.”