On July 14, 2006, Smith was traded, alongside P. J. Brown, to the Chicago Bulls in exchange for Tyson Chandler. Six days later, he was traded again, this time to the Denver Nuggets in exchange for Howard Eisley and two second-round draft choices. During his first season in Denver, Smith served a 10-game NBA suspension from December 18 to January 8 following his involvement in the Knicks/Nuggets melee at New York's Madison Square Garden on December 16. He later missed eight games between February 23 and March 11 while recovering from arthroscopic left knee surgery. After struggling in the first four games of the Nuggets' first-round playoff series against the San Antonio Spurs, including going 0-for-12 from 3-point range, Smith was benched for Game 5 of the series. Nuggets coach George Karl reportedly had had enough of Smith's mistakes throughout the series, compounded by Smith's 3-pointer with 25.7 seconds left in Game 4 with Denver trailing 93–89.