We can tell that "fail" has become an adjective because it can be preceded by the quantifying adverb so, as in "I'm so fail." [Cf. I'm so happy (adj.), but *I'm so student (n.)].

I was familiar with fail as a noun, but hadn't run across this adjectival usage until today. It has some traction. Google gives 175,000 hits for {"so fail"}, of which many are undoubtedly coincidental collocations, but the first few pages of results gives a blog named Why So Fail SMeyer, apparently founded in July, 2008, a flikr video titled LOL im so fail, and a Yahoo question titled Why is Palin so fail?.

The earliest adjectival usage I've found so far (not really looking hard) is a flikr photo from April, 2007 [update: and this self-conscious use from around the same time]. That means it's been around in adjectival form for just about as long as the noun form (unless anyone can find significant antedatings for either one).

[Update: Also see Neil's discussion of fail as a mass noun, which I had originally missed.]

[Update 2: More evidence that 'fail' is being interpreted adjectivally: First, from the comment below, the word takes other degree modifiers, like very. The search phrase {"very fail"} gets 27,800 hits, so this isn't a one-off idiom with so. Second, fail can also take degree suffixes.

Failest has 16,400 g-hits and an entry in the Urban Dictionary. The definition reads: "the art of when someone does something so epically [sic] FAIL that they just fail at life."

The definition provides not not one but two adverbs modifying fail ("so epically"). And while the definition may technically sound as if it's describing a noun, the supplied example is unquestionably adjectival:

Carol: "Wow your attempt to push a chair onto the carpet was the failest thing i've ever seen"

I tried searching on "failer" but didn't find anything useful, since this is a common misspelling for "failure."]