Preparation of SiC(0001) substrates is of high relevance to graphene growth. Yet, if only a smooth surface could be achieved, heteroepitaxy of many other two-dimensional materials comes into reach. Here we report a novel approach to hydrogen etching of SiC, based on stepwise ultrapure H exposure with slow substrate cooling rates. For the first time, the atomic evolution of the surface structure is witnessed by scanning tunneling microscopy. A detailed picture of the gas phase chemistry emerges, such as a zipper-like material desorption at step edges. The Si–C sheets are removed in layer-by-layer fashion, leading to large terraces with straight rims. The process ultimately results in an atomically smooth surface with complete H-passivation, with no detectable defect states in photoemission. The degree of perfection achieved suggests the use of this substrate as a versatile nanostructure template.