Francis Cadell's depiction of ''George Street and Charlotte Square'' was whitewashed over and the canvas was reused by the son of another colourist, Samuel Peploe.
The Scottish Gallery in Edinburgh discovered the missing Cadell during conservation.
It is estimated that the painting could sell for more than Â£50,000.
The Scottish Colourists were four post-impressionist painters, Peploe and Cadell, along with John Leslie Hunter and John Duncan Fergusson.
They absorbed and reworked the strong and vibrant colours of contemporary French painting into a distinctive Scottish idiom during the 1920s and 1930s.
The lost Cadell work was painted around 1909 from his studio at 112 George Street, Edinburgh, and looks across the street to Charlotte Square.
When the artist died in 1937, his sister Jean Percival Clark, well-known as the actress Jean Cadell, came up to Edinburgh to sort out his affairs.
She was helped by Denis Peploe, son of Samuel, who was a student at Edinburgh College of Art.
She gifted him some of her brother's art material and included among the canvases, probably including "George Street and Charlotte Square", taken off its stretcher, turned and re-stretched ready to be used again.
It is not known why Cadell abandoned the painting, which is finished and bears a strong signature.
Years later, Denis Peploe painted his own picture, Begonias, a still life on a trestle table and whitewashed over the Cadell exposed on the other side.
The Scottish Gallery acquired the Denis Peploe and in the process of conservation discovered the Cadell on the reverse.
Denis's son, Guy, who is director of the Scottish Gallery, told BBC Scotland that he had bought the painting at auction and was shocked when he got a call from the picture conservator.
"He said 'I think there's something interesting on the other side of the picture'.
"I said go-ahead take it off its stretcher and see what we can see. He called back a few minutes later and said 'bottom left hand corner, signature FCB Cadell.'
"I think I choked on my morning roll."
Tommy Zyw from the Scottish Gallery said: "It is heard of to have paintings on either side of a canvas.
"Occasionally if an artist is struggling, he flips it over and tries again.
"But in this case this is quite unusual to have two paintings by two different artists - linked by a family friendship."
A lost painting by one of the Scottish Colourists has been discovered on the reverse of another artwork.