Sometimes in trying to decide something I might imagine a more extreme case, and see what it tells me...
If several sessions were run, with leveling up and all as expected, and then you said, "Hey, remember that soothsayer back in the first session? He actually put you all to sleep and everything we've been doing is a dream. You are all first level characters", people would likely be upset.
If they are playing the dream just as they would play anything else, why not give them XP? If you need a narrative explanation to justify it, maybe they gained insight (into the world, into themselves, etc.) that will help them from there forward.
Gnome Boy (a.k.a. "Jon") • DCC play-tester @ DDC 35, Feb 2011. • Beta DL 2111, 7:00 AM PT, 8 June 11.Playing RPGs since 1977
• Quasi-occasional member of the Legion of 8th-Level Fighters - Holds the power to play gnomes at will!Here Be DCC Monsters...General Yoros, Warrior, Str 13, Agl 8 (10), Stm 17, Per 13, Int 11, Lck 8; Law, HP 39, AC 17, R+2, F+4, W+2, band/shld, warhammer, longsword, longbow, pitchfork
Han Dee, (Weaver) Neutral Thief, Str 10, Agi 13, Stm 11, Per 11, Int 15, Lck 14, AC 13 (Leather), HP 25, Luck Die d6, Backstab 3, Sneak Silently 10, Hide In Shadows 9, Pick Pocket 10, Climb Sheer 10, Pick Lock 9, Find Trap 9, Disable Trap 9, Forge Doc 10, Disguise 3, Read Lang 5, Handle Poison 3, Cast Scroll d14+2, birth augur (Born under the loom) +1 to all skill checks (including thief skills), Banepicks (auto pick lock/disable trap, but lose 1d3 random ability loss, if a 3 then 1 pt is perm)