Sensors play a vital role in our daily lives and are an essential component for Internet of Things (IoT) based systems as they enable the IoT to collect data to take smart and intelligent decisions. Recent advances in IoT systems, applications, and technologies, including industrial Cyber-Physical Systems (CPSs), are being supported by a wide range of different types of sensors based on artificial intelligence (AI). These smart AI-based sensors are typically characterized by onboard intelligence and have the ability to communicate collaboratively or through the Internet. To achieve the high level of automation required in today’s smart IoT applications, sensors incorporated into nodes must be efficient, intelligent, context-aware, reliable, accurate, and connected. Such sensors must also be robust, safety- and privacy-aware for users interacting with them. Sensors leveraging advanced AI technologies, new capabilities have recently emerged which have the potential to detect, identify, and avoid performance degradation and discover new patterns. Along with knowledge from complex sensor datasets, they can promote product innovation, improve operation level, and open up novel business models. We review sensors, smart data processing, communication protocol, and artificial intelligence which will enable the deployment of AI-based sensors for next-generation IoT applications.