Use selection tool. Set the 'Tool Options' to the shape you desire and the feather you want to use. You can pick any size feather and any shape, but for this one I used the rounded rectangle and feather of 20.
Surround the image as close as you want to be shown. As soon as you let your finger off the mouse, the feather is going to expand on the image like so:
(See the 'Marching ants')
Next, hit 'Ctrl X' to cut. Your image will look like this:
Then 'Ctrl V' to paste as a new image. Now you have a new image which looks like this:
