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Buddhism and Taoism are similar religions which contain many similar beliefs and practices, such as a belief in reincarnation and extensive use of meditation. At face value, many people perceive Taoism and Buddhism to be the same thing, and in fact the first Taoists to hear about the teachings of Buddhism coming out of India concluded that the Buddha must have been a reincarnation of Lao Tzu, the alleged founder of Taoism in China in the 6th Century BCE and writer of the Tao Te Ching, one of two central Taoist scriptures (The other is the much older I Ching).
There are, however, a number of significant differences between the two religions which reflect the often optimistic nature of Chinese religions and the sombre conclusions that Siddhartha Gautama came to on his road to Buddhahood in the 5th Century BCE. The first of these differences is the basic Taoist belief that life is good and can be improved by following the Tao or Way of nature, which provides us with the ultimate example in how to live naturally and harmoniously. Buddhists on the other hand hold the belief that life is suffering, or "Dukkha." This suffering can range from the worst grief and pain to the minor frustrations and dissatisfaction that we all experience in day to day life.
This difference in attitude leads to a difference in goals between the two religions. The goal of a Taoist is simply to live in harmony with the Tao and achieve good rebirths in future lives, or in some cases to achieve immortality, a slightly nebulous goal which can range from literal physical immortality to heavenly immortality; this involves remaining immobile for around ten years with the aim of achieving merging the body and spirit into a "body of light" in a manner which bears a passing resemblance to the Tibetan Buddhist achievement of the Rainbow Body as in both cases, the body of the Master disappears leaving only clothes or sometimes toenails. The Goal of a Buddhist, however, is to achieve liberation from the cycle of Rebirth (Samsara) by the dissolution of the five aggregates which constitute the ever-changing and impermanent spirit which continually gets reborn into either different human bodies or into Heavenly, Hellish, or Animal realms depending on the consequences of one's Karma or Actions in the previous life. Once the five aggregates have been dissolved by Awakening or or becoming a Buddha (an awakened being), the mind is liberated from the illusion of being a separate, isolated ego and enters a state of liberation called Nirvana; this is generally believed to be beyond human concepts but which may be interpreted as a state of Non-dualism in which individual egos do not exist, which means that the mind is no longer subject to being reborn over and over again.
In conclusion, the fundamental difference between Taoism and Buddhism can be summarised as a goal to embrace nature's way of life in the case of Taoism and the goal of escaping from suffering in the case of Buddhism. In this regard, the two religions are not incompatible as it could be argued that mankind's failure to live in accordance with the way of nature has been the cause of much suffering in the past; the valuable lessons of the natural world provide us with an excellent example of how both Buddhists and Taoists can embrace a healthier way of living, regardless of whether we follow the Tao or the Dharma.