Slang meaning "homosexual" (adj.) begins to appear in psychological writing late 1940s, evidently picked up from gay slang and not always easily distinguished from the older sense:
After discharge A.Z. lived for some time at home. He was not happy at the farm and went to a Western city where he associated with a homosexual crowd, being "gay," and wearing female clothes and makeup. He always wished others would make advances to him. ["Rorschach Research Exchange and Journal of Projective Techniques," 1947, p.240]
The association with (male) homosexuality likely got a boost from the term gay cat, used as far back as 1893 in American English for "young hobo," one who is new on the road, also one who sometimes does jobs.
"A Gay Cat," said he, "is a loafing laborer, who works maybe a week, gets his wages and vagabonds about hunting for another 'pick and shovel' job. Do you want to know where they got their monica (nickname) 'Gay Cat'? See, Kid, cats sneak about and scratch immediately after chumming with you and then get gay (fresh). That's why we call them 'Gay Cats'." [Leon Ray Livingston ("America's Most Celebrated Tramp"), "Life and Adventures of A-no. 1," 1910]