I know someone that polyurethaned her construction grade pine stairs. I don't care for it, because the pine looks so cheap. I think I'd rather see an opaque stain used to hide the knots and pine grain. Last Fall I pulled the carpet off of my own stairs. I had a better situation than weedyacres to start with, because my stairs all have a nice "overhang" on the treads. I removed all of the staples and then sanded each step with an electric sander. Of course the sanding made a huge mess, but we had drywall dust everywhere at that time anyway. I'm not sure the sanding was necessary so you might want to be guided by your concern over the sanding dust. The next step was to create a smooth finish on the pine by using a floor filler compound. This stuff just fills in all the staple and nail holes and all of the many grooves that are naturally in the rough pine. It's very easy to apply and drys in 30 minutes. I used a good oil based stain blocker/primer which dries in a half hour. I painted the risers with a regular white wall paint. Finally, Benjamin Moore color matched the Butterscotch Oak floor I had just installed in my living room. I bought a gallon of their floor paint, which was about $75. The floor paint is super thin so it was necessary to put three coats on the treads. Even with three generous coats, I think I used less than a pint to do 6 treads. The beauty of the BM floor paint is that you can walk on it after 30 minutes. When I say you can walk on it, I mean you won't track the paint anywhere. It's like the paint is totally bonded to the stair surface in a half hour. BUT, the top side of the paint, remains tacky for as long as a week. This means you can walk on it, but it grabs every single thing off the bottom of your shoes and holds it. It pulls the fibers right off of your socks. Obviously whatever it grabs, is going to remain in the paint, discoloring it and affecting the finish. A lot of people will use a quarter round molding to cover the gaps between the tread and riser, etc. I hate quarter round. I just filled in the gaps with the floor filler and I think it looks fine as it is. I estimated it would cost me about $100 per stair to put hardwood treads and risers on. I thought if I used good hardwood, I'd end up covering most of it with a runner, to protect the wood. If I was going to use a runner anyway, I thought I'd try the paint, because so little of the stair would show. Well, I never expected the paint to hold up to our traffic. Now that it's been three months and there is no sign of any wear, I'm thinking of skipping the runner. I LOVE the painted stairs and I love not having to use a runner. You'll see some scuff marks on the risers. I never understood why I heard people talking about this problem, as I was sure my feet NEVER touch those risers. Guess what? Your HEELS hit the risers when you are walking down the stairs. I will be repainting the risers soon. The scuff marks you see, happened when the paint was not fully cured. Finally, my stairs are practically orange. They are a perfect match to my oak floor, but the color looks strange when it is paint. I may change the color at some point. Here is a link that might be useful:

If you are looking to do a decorative carpet on the stairs (only) then one way to do it is to use the carpet as a RUNNER...not a stringer-stringer carpeting. The other thing to consider is normally the stairs should match "something". If you have different carpet at the top of the stairs that does not match the stair carpet, that NORMALLY means you have different carpet DOWN stairs. The stairs will match the carpeting on the MAIN floor. I'm not hearing that this is your scenario. What type of flooring do you have on the main floor? This is what the stairs will be MATCHING if you choose to go this route (stairs not matching carpet upstairs). The other way to do this is to use the decorative carpet on the stairs and then pay to have an area rug cut and bound in your chosen "stair" carpet. This area rug then sits in the entrance/bottom of the stairs. This is a quick, easy (slightly less expensive) way to get the stairs to match "something".....'cause they really should match something. Right now they match the upstairs carpet. Once you change this design feature, you need to REPLACE it with another version of "must match something". The bound area rug in the same carpet is one of the fastest ways to do this. Good luck. Remember to look at your main level flooring and decide whether or not you want to go forward with this concept.

I'm assuming the plywood is the same level as the finished wood? If so, and it's not inset, I'd do as others suggest and widen it bring it farther toward the wall. Looks like they centered the carpet on the stairs, then added the railing, which makes it off-center from the usable part of the stairs. If the plywood is inset and lower than the finished part, I'd see if the carpet layers can add more padding to make it level so you can widen the carpet over onto part of the finished floor. Of the 2 I think the patterned one is best, but I think you can do much better. I'd also go for more pattern, like Patrica shows or even a Persian style if it works with the rest of your furnishings/style. I'm afraid the light color would get dirty more quickly (or show the dirt at least).more brown:

Back up and take another photo. We have no idea what we are looking at