DAC vs. SoundCard... what's the difference/what's better?

Well, anything that converts a digital signal to analogue is a DAC. People often refer to a sound card that plugs in via USB instead of inside your computer as an "external sound card". These have connections for mice and instruments and are used for amateur music making. Many companies make "audiophile" DACs, originally just the digital to analogue section of a CD player in a separate box. Since computers have become popular as a digital "transport" so have DACs as computer sound cards, until fairly recently, were very poor from an audiophile perspective.

This is not a easy question with one simple answer. There are many great soundcards and many great external units. The answer would depend on what you need for features, output options and your budget.

All sound cards have a DAC as well, that's what processes the digital signal from the computer into an analog signal that can be amplified. There is also an integrated mini amplifier on sound cards that accomplishes the latter task.

When people say "DAC" they're referring to an external box that's specialized only for the purpose of converting a digital signal to an analog one. You probably already know that a device specialized for one task will be better at it than a device that does multiple tasks such as a soundcard.

If you're using a computer and want to use an external DAC, you still need some way to transport the digital signal to the DAC for it to work. This is accomplished by a soundcard's digital output (many integrated motherboard soundcards have these as well, albeit of lower quality). In this case, the soundcard is acting as a transport and relegating all the D/A conversion to the external DAC by providing it the digital signal.

Some external DACs also run off USB, which eliminates the need for a soundcard to act as a transport. Basically, this would simply require you to connect a USB cable from your computer to the DAC. This is the simplest option but also, usually, the lowest quality one. This is all IME and I am generalizing here about USB vs optical/coaxial.

I've omitted some details and options for the sake of simplicity but this should give you a general idea. The answer to your question really is pretty simple.

An advantage to buying an external DAC vs. a computer sound card is that the DAC won't be obsoleted as fast. Computer peripherals get obsoleted quickly. How many years will you get to use the sound card before it becomes useless because your next computer either doesn't have a compatible slot or you switch to a laptop? A traditional external DAC, even one that includes a USB input, will continue to be useful for years. It would be silly to spend several hundred on an internal sound card for a computer considering how fast it will be obsoleted. It's not as silly to spend that much or more on an external DAC that will have a longer useful lifetime and future resale.

You can use a DAC in place of a sound card. I hooked up a USB DAC and all of my sounds run out through that.

You need some kind of digital output from your computer: USB or S/PDIF using a coaxial or optical cable. Many sound cards have these.

A DAC doesn't "make the music better" but better DACs do a better job of re-constructing an analogue signal from the digital data and sending out a good analogue signal.

A standalone DAC has 4 main sections, more or less:

1. A power section (as do other audio components) that converts the incoming power to a suitable voltage. This is often in a wallwart. Some can use the power from a USB port instead. This also includes varying amounts of circuitry to remove fluctuations and filter out noise in the incoming power caused by interference and the like in household power lines or the noise that comes over USB from interference inside the computer. A high-end DAC costing thousands of dollars may be something like 70% power filtering circuitry alone. Noise and inconsistency in the power for each of the parts of a DAC will result in lower sound quality.

2. An input section that converts the signal from USB or S/PDIF into the kind of signal that the DA chip can read, which is different. Other things may go on here, which I wont get into (up-sampling, oversampling and filtering).

3. The DA converting stage.

4. An output stage, which is a mini amplifier, as the signals from a DA chip are very small. The signal must be strong enough to pass through interconnect cables to another device. The quality of the output stage often gives the DAC its "sound". You'll find quite a few threads where people talk about modding DACs or sound cards by changing the chips used in the output stage to improve the sound, as these chips come in different levels of quality and vary considerably in how they affect the sound.

I hope that gives you some idea of why you can buy a DAC or sound card for anywhere between $50 or $50000.

DAC's have the major advantage of not suffering from EMI/RFI within the PC case....but they also require good jitter over the S/PDIF connection, so using an onboard soundcard to get out of the PC is not a good option.

plain USB is also very prone to jitter...luckily, some manufacturers make their own drivers to minimize this issue.

I think this only matters if you're spending many hundreds or more on a DAC. USB is fine if you just want a cheap DAC or combo amp/DAC IMO.