FML. That is fixed on 2.32. Basically it doesn't do pct-decoding as it should:

commit 196c21c5a0e2f9b3149689ea36789cf0478d893a
Author: Farid Zakaria <farid.m.zakaria@gmail.com>
Date:   Wed Jul 16 21:09:59 2025 -0700

    Add helpful messages when file:// used as tarball
    
    When `file://` is used accidentally in a flake as the source it is
    expected to be a tarball by default.
    
    Add some friendlier error messages to either inform the user this is not
    in fact a tarball or if it's a git directory, let them know they can use
    `git+file`.
    
    fixes #12935

diff --git a/src/libfetchers/tarball.cc b/src/libfetchers/tarball.cc
index b0822cc33..59316eabd 100644
--- a/src/libfetchers/tarball.cc
+++ b/src/libfetchers/tarball.cc
@@ -111,6 +111,25 @@ static DownloadTarballResult downloadTarball_(
     const Headers & headers,
     const std::string & displayPrefix)
 {
+
+    // Some friendly error messages for common mistakes.
+    // Namely lets catch when the url is a local file path, but
+    // it is not in fact a tarball.
+    if (url.rfind("file://", 0) == 0) {
+        // Remove "file://" prefix to get the local file path
+        std::string localPath = url.substr(7);
+        if (!std::filesystem::exists(localPath)) {
+            throw Error("tarball '%s' does not exist.", localPath);
+        }
+        if (std::filesystem::is_directory(localPath)) {
+            if (std::filesystem::exists(localPath + "/.git")) {
+                throw Error(
+                    "tarball '%s' is a git repository, not a tarball. Please use `git+file` as the scheme.", localPath);
+            }
+            throw Error("tarball '%s' is a directory, not a file.", localPath);
+        }
+    }
+
     Cache::Key cacheKey{"tarball", {{"url", url}}};
 
     auto cached = settings.getCache()->lookupExpired(cacheKey);

Specifically this:

std::string localPath = url.substr(7);
+        if (!std::filesystem::exists(localPath)) {
+            throw Error("tarball '%s' does not exist.", localPath);
+        }

John Ericson: looks like there is some issue now when using the current stable nix against a new nix daemon?

clan-env % nix develop
path '/home/joerg/git/clan-core/pkgs/clan-cli' does not contain a 'flake.nix', searching up
error:
       … while checking derivation '/nix/store/v8qnm8aabm0fp0v2xf3cavsgwqfgc2bk-clan-env.drv'

       error: derivation has incorrect deferred output, should be '/nix/store/jq6nq5bvdv23xdjajsaj2ay6vni5bkki-clan-env'

clan-env % real-which nix
/nix/store/ah8kqqslr7jig18fd4hzmdk2bhbqs8a7-nix-2.31.2/bin/nix


clan-env % /nix/store/7ykgjirdiwxkdwyh3hypd27ifx7aws29-nix-2.33.0pre20251208_5b5d4cb/bin/nix develop
path '/home/joerg/git/clan-core/pkgs/clan-cli' does not contain a 'flake.nix', [joerg@eve clan-cli]$

In reply to @joerg:thalheim.io

John Ericson: looks like there is some issue now when using the current stable nix against a new nix daemon?

clan-env % nix develop
path '/home/joerg/git/clan-core/pkgs/clan-cli' does not contain a 'flake.nix', searching up
error:
       … while checking derivation '/nix/store/v8qnm8aabm0fp0v2xf3cavsgwqfgc2bk-clan-env.drv'

       error: derivation has incorrect deferred output, should be '/nix/store/jq6nq5bvdv23xdjajsaj2ay6vni5bkki-clan-env'

clan-env % real-which nix
/nix/store/ah8kqqslr7jig18fd4hzmdk2bhbqs8a7-nix-2.31.2/bin/nix


clan-env % /nix/store/7ykgjirdiwxkdwyh3hypd27ifx7aws29-nix-2.33.0pre20251208_5b5d4cb/bin/nix develop
path '/home/joerg/git/clan-core/pkgs/clan-cli' does not contain a 'flake.nix', [joerg@eve clan-cli]$

In reply to @dramforever:matrix.org
the tests just fail on linux without sandbox...