is "我是在說笑話" grammatically correct?

It is correct, grammatically. But it is more like "I'm telling a joke" than "I was just joking."
I think 我只是在開玩笑 is much better.
(It's for traditional Chinese. I think there are some differences between simplified and traditional. 雖然一樣是中文，可是說法有點不同)
It can be used when someone take your words too seriously, and then you can say "我剛剛是開玩笑的(or 我剛剛只是在開玩笑)，別太認真啦。"
We don't usually use 笑話 in this case.

It's better like this: 我只是說笑話

they don't use the verb "shuō" in such a way.

The right expression (idiomatic) is 开玩笑

so you should say

我只开玩笑

"我是在說笑話" is grammatically correct, but I think "我只是在說笑話" would be better.

是
In English: was (be)

只是
In English: just

no it's not...
must be 我只开玩笑...

You can eliminate the verb to be .. Western grammar does not work in Chinese --- not that we would not understand it --- just it is weird and unusual.

我在說笑話 --- works.

You also need to know that only English speaking countries have this unnatural worship of comedians. You must be careful that this is the fastest way to become persona non-grata. You do not walk into a Japanese house with your shoes on .. and you do not try to get cute, especially using your own language ..