Smith's first trip to the playoffs during the 2006–2007 season, with the Nuggets, proved disappointing. Smith, a 39% three-point shooter during the regular season, failed to connect on any three-point shots in the first four games and was criticized for poor decision-making by coach George Karl. After game four, Karl informed reporters of his plan to bench Smith for all of game 5. Karl said, "He's done," and explained his frustrations over Smith's poor judgment to shoot a three late in the game, "I have no idea what planet that came from." Karl told the Associated press that he had drawn up the play to give the ball to either Allen Iverson or Carmelo Anthony. Karl did not stop there and continued venting over Smith's poor play, "And then, of course the one with eight seconds to go, from 50 feet, I just love the dignity of the game being insulted right in front of me.
On October 13, 2007, Smith was involved in an incident at a Denver nightclub. The Nuggets suspended him for the first three regular season games of 2007–2008 for his role in the incident. During the season, Smith averaged 12.3 points, 2.1 rebounds, and 1.7 assists.
In Smith's second trip to the playoffs, during a first-round matchup with the Lakers, he played 27.0 minutes, averaging 18.3 points per game on 53.5% shooting. He also had a 31.8% three-point shooting percentage; however, the Nuggets were swept in the first round.