The bombshell news dropped on Saturday morning, but it's unclear when the photo was taken.
A video showing Smith at a party has also been circulating on social media.
It's unclear what substance is in the bag, but the Bulldogs confirmed on Saturday they are looking into the matter.
"The Western Bulldogs are aware of images of Bailey Smith circulating on social media," the club said in a statement.
"The club is investigating the legitimacy of these images and is not in a position to comment further at this time."
Smith shot to cult hero status last year, with his hot form and trademark mullet making him one of the most recognisable players in the league.
But the 21-year-old has struggled with the attention at times and took a leave of absence last December to deal with personal issues.
Smith is currently serving a two-match ban for headbutting Geelong's Zach Tuohy.
"I understand what happened was outside of what's expected of AFL players. Unfortunately, I let my emotions get the better of me, which is out of character for me," Smith said after that incident.
"I am determined to come back in a couple of weeks to continue giving 100 per cent for my teammates and the club."
The Bulldogs (6-6) have a bye this week before taking on the Giants next Saturday.
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