The two sides are in advanced negotiations, according to the Financial Times.
The talks come at a time when competition in the streaming music sector is intensifying.
Sweden's Spotify remains the market leader but faces increasing competition from Apple Music and Amazon's recently launched music service.
German-based SoundCloud built its business by allowing artists to upload their music and share it with fans on social media and blogs.
It has established the company as an influential player in the music industry, especially in the dance music genre.
In March, the company launched a pay-for streaming service similar to the offering from Spotify or Apple Music.
No profit so far
The firm has failed so far to make a profit, but has Twitter as its most high profile investor.
Mark Mulligan, an analyst at consultancy Midia, has been blogging on the takeover claims.
"Soundcloud has been shopping itself around for some time, while Spotify needs to continue outpacing Apple as it heads towards an initial public offering."
But a deal would be "far from a guaranteed winner for Spotify" as Soundcloud's growth may have "peaked" in 2014, he says.