It has been rumored for a few weeks that Square (SQ 0.46%) had been in talks to acquire Credit Karma's tax prep business, and now it's official. Square's Cash App announced today that it has agreed to acquire Credit Karma Tax for $50 million in cash.
Credit Karma Tax provides a free tax-filing service for consumers that has helped more than 2 million people file their tax returns. That's roughly 2.5% of the estimated 80 million taxpayers who filed their tax returns electronically and without professional assistance in the 2020 tax filing season.
At first glance, this may seem like a strange acquisition for the fintech giant, as tax prep is somewhat outside of Square's core competencies at the moment. But it serves very valuable purposes.
For starters, Square's long-term goal with its Cash App is to become a one-stop financial services shop for its customers, and adding tax prep functionality certainly helps it do that. Credit Karma Tax has a reputation as a very user-friendly platform, and since the average tax refund is over $2,000, it could bring more money into users' accounts.
Second, the Cash App active user base has been growing rapidly, and by exposing the more than 2 million Credit Karma Tax users to the platform, it could be yet another growth catalyst. It's fair to assume that a good percentage of Credit Karma Tax users already use Cash App, but there's still likely to be significant potential to bring new users into the Cash App ecosystem here.
Finally, this acquisition is a tremendous value since $50 million is a relatively minuscule price for a successful tax-prep platform, especially when you consider the benefits it could have for the Cash App ecosystem.