Nepali men and women who identify themselves as transgender are seeking citizenship certificates with their gender marked as "third sex" instead of male or female.
Sunil Babu Pant, lawmaker and founder of the Blue Diamond Society, a gay rights group, said more than 70 people were detained near the prime minister’s office and parliament.
"We are running out of patience and are demanding our rights," Pant told Reuters from a detention centre.
"Without the citizenship papers, the sexual minorities are unable to get a job, enrol in schools or colleges, seek treatment in hospitals and travel," he said. "They cannot even inherit parental property."
In 2007, the Supreme Court ordered the government to amend laws to end discrimination against homosexuals, and give them the same rights as other citizens.
Government officials were not immediately available for comment.
Kathmandu police chief Ramesh Kharel said the activists were detained for "violating the norms" by gathering at a place where demonstrations were not allowed.
Hindu-majority Nepal has become more gay-friendly over the last few years, but homosexuality still remains taboo for many people in this conservative Himalyan nation.
Same-sex marriages have taken place in public and gay beauty contests are held.
A travel agency run by gay people is offering to organise same-sex weddings at Mount Everest in a move to promote the scenic mountainous nation as a gay-friendly tourist destination.
(Reporting by Gopal Sharma; Editing by Sugita Katyal)