As I'm sure you know, this is a perennial question which never reaches a really satisfactory conclusion.  Here is the definition formulated by the International Folk Music Council in 1954:

Folk Music is the product of a musical tradition that has been evolved through the process of oral transmission.  The factors that shape that tradition are: (i) continuity which links the present with the past; (ii) variation which springs from the creative impulse of the individual or the group; and (iii) selection by the community, which determines the form or forms in which the music survives.
The terms can be applied to music that has been evolved from rudimentary beginnings by a community uninfluenced by popular and art music and it can likewise be applied to music which has originated with an individual composer and has subsequently been absorbed into the unwritten living tradition of a community.
The term does not cover composed popular music that has been taken over ready-made by a community and remains unchanged, for it is the re-fashioning and re-creation of the music that gives it its folk character.

Obviously this is not an absolute definition, but provides a good point from which to start.  The waters have become considerably more muddied since the '50s, not least due to the record industry's decision to promote as folk music pretty much anything that didn't fit into any other of its handy marketing categories; in particular the "singer-songwriter" genre, which rarely has anything at all to do with folk music in any real sense.  Well, somebody else's turn, now; and a wooden spoon to the first person to dredge up that tired old cliché involving horses...

Malcolm