In a vote on Tuesday, the motion was passed with a majority of 50.6 percent.
Despite the result, possession or use of the psychedelic mushrooms will still technically be illegal. However, police will now treat users of the drug above the age of 21 as their lowest priority and will no longer be 'spending resources to impose criminal penalties'.
The vote referred specifically to psilocybin, the psychedelic chemical in magic mushrooms which under US federal law belongs to the same group of banned drugs as heroin and LSD.
Denver has voted to decriminalise magic mushrooms. Credit: PA
Campaigners who have fought for the drug to be decriminalised have argued that it is wrong for people to end up behind bars after using magic mushrooms to cope with problems like depression and post-traumatic stress disorder.
Decriminalise Denver said: "No-one should go to jail, lose their children, lose their job, and lose their citizen's rights for using a mushroom. One arrest is too many for something with such low and manageable risks for most people, relative to its potential benefits."
Speaking while votes were still being counted, Kevin Matthews - who led the Decriminalise Denver campaign - said a victory would be 'against all odds'.
The vote was passed by a tiny majority. Credit: PA
According to the Denver Post, he said: "It's been one hell of a 21 and a half hours. If these results hold, this is an example of the absurd comedy of the great metaphor.
"Against all odds, we prevailed. This is what happens when a small team of dedicated and passionate people unite under a single idea to create change."
Cannabis was decriminalised in Denver in 2005 and many opponents feared decriminalising magic mushrooms might portray the city as a drug haven to outsiders.
Jeff Hunt, director of the Centennial Institute at Colorado Christian University - who questioned whether votes had been tampered on Twitter - said drugs were damaging the city.
According to the Denver Post, he said: "We'll continue to fight the growing drug culture. Denver's becoming the illicit drug capital of the world. The larger issue here is not good for our city.
"Marijuana has brought more problems than it's solved to our city and our state, and if we continue to go down this track, we're going to continue to see Colorado get in worse and worse shape."
Featured Image Credit: PA