Lab 11, in Birmingham, had set up a huge marquee and had around 120 people inside not wearing masks on Saturday.
Officers found people dancing at the venue in Trent Street, Digbeth, on Saturday when following up concerns over households mixing.
The organisers claimed the event was being held outdoors despite the marquee having a roof and walls.
Like much of the West Midlands, people in Birmingham are currently banned from mixing with different households indoors under the tier 2 "high" coronavirus alert level.
The Wolverhampton, Walsall, Sandwell and Solihull areas are also under tier 2, which means businesses and venues can still open with coronavirus rules in place.
People are not allowed to mix with other households inside and cannot meet in groups of more than six outside and the 10pm national curfew bans restaurants and pubs from opening after 10pm.
Sergeant Nick Giess, from Birmingham police’s licensing team, said: "The venue tried to argue that it was an outdoor event, but there were walls and a roof so it was essentially a building and did not fall into the same category as a beer garden.
"We spoke to people sat at five tables, and four of them had people from different households on.
"People were being allowed to freely move around without masks on and dance to really loud music – all of which goes against the rules that have been put in place to stop the virus spreading.
"People shouldn’t think that we’re trying to stop people’s fun. It’s the opposite – we’re trying to protect people and limit the spread of the virus so that restrictions can hopefully be eased."
It is the fourth £10,000 fine handed out by the force, with the organiser of an illegal rave in Walsall among the others given the penalty.