I'm also using a SB2 coax into a Benchmark DAC-1. My understanding is that using the Squeezebox digital volume control maintains "bit perfect" output until you drop below ~34-35. Therefore, I have adjusted the DAC-1 volume so that SB Vol=40 is the loudest I could possibly want, and then use the SB remote for further attenuation. For serious listening, I usually run 36-38, depending on album gain. For low (background) listening, I don't care if I "lose" a few bits... still sounds fine.
Sean has also stated there is NO difference keeping the SB Vol=40, vs. turning off digital volume control altogether.