Previous work found that the co-occurring mutations R203K/G204R on the SARS-CoV-2 nucleocapsid (N) protein are increasing in frequency among emerging variants of concern or interest. Through a combination of in silico analyses, this study demonstrates that R203K/G204R are adaptive, while large-scale phylogenetic analyses indicate that R203K/G204R associate with the emergence of the high-transmissibility SARS-CoV-2 lineage B.1.1.7. Competition experiments suggest that the 203K/204R variants possess a replication advantage over the preceding R203/G204 variants, possibly related to ribonucleocapsid (RNP) assembly. Moreover, the 203K/204R virus shows increased infectivity in human lung cells and hamsters. Accordingly, we observe a positive association between increased COVID-19 severity and sample frequency of 203K/204R. Our work suggests that the 203K/204R mutations contribute to the increased transmission and virulence of select SARS-CoV-2 variants. In addition to mutations in the spike protein, mutations in the nucleocapsid protein are important for viral spreading during the pandemic.