The tintype photo – dated August 2, 1880 – was acquired in 2011 by US lawyer Frank Abrams at the market near the city of Asheville, North Carolina.
After watching a TV programme two years later about the discovery of another photo of the outlaw which was later valued at £3.7 million, he consulted expert advice.
Historians told Mr Abrams the image may show the notorious law-breaker with a gang of men, one of whom is thought to be Sheriff Pat Garrett, Billy the Kid’s former friend and the man who supposedly gunned him down.
Mr Abrams, a criminal defence lawyer, had hung the photo for several years on the wall of a spare room in his home that he rented out.
He said: “If I had known it was one of the most famous photos in history, I would have charged more for the room.”
Initially Mr Abrams came to suspect that one of the five men pictured in his tintype image was Patrick Floyd Garrett.
He enlisted Robert Stahl, professor emeritus at Arizona State University, as well as several other forensic experts, for identification.
William Dunniway, a tintype expert, told the New York Times the photo was probably taken between 1875-80.
Mr Dunniway then worked with Los Angeles forensic video expert Kent Gibson to investigate the picture.
Mr Gibson used facial recognition software to conclude it was most likely a photo of Billy the Kid and Sheriff Garrett.
A handwriting expert in Texas compared a signature from Sheriff Garrett on the photo with 10 documents that included his handwriting, and found a match.
Even though the experts say the photo may be worth millions of dollars, Mr Abrams says he is no rush to sell it.
He told the BBC: “I’ve never put a price on it. My interest is in the history.”
Outlaw Billy the Kid fell into a career of thievery and lawlessness and is widely thought to have killed 21 people, though some sources put the figure as high as 27.
After being hunted across the southern US states and northern Mexico, he was captured and sentenced to hang for the 1878 murder of a county sheriff, but escaped.
Soon after that he was found and killed by Sheriff Garret on July, 14 1881.
It it thought the pair were close friends until Garrett became sheriff of Lincoln County, New Mexico.