Orson Welles (centre) made Citizen Kane at the age of 25
The Oscar was for best original screenplay and was given jointly to Welles and Herman J Mankiewicz.
Sotheby's auction house in New York said it will auction off the statuette on 11 December.
Many critics regard Citizen Kane, about a power-hungry newspaper baron, as one of the best films ever made.
Leila Dunbar, senior vice president at Sotheby's, said the prestige of the film added to the statuette's value.
Held in secret
"The movie had a star-studded cast," she said. "Welles was fearless in the filmmaking and he had complete autonomy, all of which helped him create a landmark movie."
The Oscar was believed to have been lost until it appeared at a 1994 Sotheby's auction.
A Los Angeles cinematographer had held it in secret, after being given it by Welles as payment for working with him.
Welles' youngest daughter, Beatrice, claimed the Oscar for herself after suing Sotheby's and the cinematographer.
But when she tried to sell it, the academy tried unsuccessfully to sue her as part of its longstanding goal of keeping Oscars out of commercial markets.
Since 1950, the academy has required Oscar-winners to give it the first right of refusal to buy back an Oscar for $1.
In 2003, Welles sold the Oscar to the Dax Foundation, an LA-based non-profit group that supports various educational, health and other causes. It is being auctioned by Dax.In 1999, the best picture Oscar for Gone With the Wind fetched more than $1.5m and Vivien Leigh's best actress statuette for the same movie made more than $550,000.