How can I remove the %20 from a URL evaluted by a contextual filter?
Don't worry, Drupal won't leave you hanging with ugly urls.

1) Open your contextual filter in the admin interface.

2) Expand the "More" section at the bottom.

3) Check "Transform spaces to dashes in URL"

Terms like "my-taxonomy-term" will now be processed as "my taxonomy term"

Bonus: If you need that term to be capitalized for the page title, change "Case" to "Capitalize each word" (also in the "More" section).