The German club said the 18-year-old Paredes signed a contract until the end of the 2025-26 season.
D.C. said the transfer fee is its record high for a sale. The deal includes additional money contingent on performance and a percentage of any future transfer fees.
"Despite his age he's already gained some experience at first-team level, and as well as the left wing he can also play in the center,'' Wolfsburg sporting director Marcel Schafer said. "In addition, he brings pace and dynamism, he's very agile and nimble on the ball, covers a lot of ground on the pitch and has a really good mentality.''
Paredes came through the D.C. youth academy before making his professional debut as a 16-year-old for Loudoun United, the Washington-based club's reserve team, in 2019.
The Virginia-born player returned to D.C. in 2020 and went on to make 41 appearances across all competitions, scoring three goals and setting up two more.
"Kevin's rapid rise from our academy to a first-team starter is a testament to his desire, talent, and commitment," D.C. president of soccer operations Dave Kasper said in a statement. Paredes has two goals in five appearances for the United States under-16 team. He attended senior national team camp last month but injured his left ankle and left before the exhibition against Bosnia and Herzegovina.