I think we can get back to the subject of Daoism through returning to the much-maligned Venerable Vimalākṣa spoken of above. From his commentary to the ātmaparīkṣā, specifically focussing on the simile of the ocean
Some people teach that there is a soul, in which case it must be of two kinds. Either the five skandhas are themselves the soul, or the soul exists apart from the five skandhas.
If the five skandhas are the soul, then the soul will have the characteristics of arising and ceasing. Thus it says in the verse ‘if the soul is the five skandhas it will have the characteristics of arising and ceasing’, and why? Becuase once arisen, it will perish. Because they have the characteristics of arising and ceasing, the five skandhas have no permanence, and just as the five skandhas have no permanence, the two dharmas of arising and ceasing likewise have no permanence. Why is this? Because arising and ceasing also perish after they have arisen and hence are impermanent. If the soul were the five skandhas, then, since the five skandhas are impermanent, the soul would also be impermanent and would have the characteristics of arising and ceasing, but this is not correct.
If the soul existed apart from the five skandhas, the soul would not have the characteristics of the five skandhas. As it says in the verse: ‘if the soul is different from the five skandhas, then it will not have the characteristics of the five skandhas’. Yet no other dharma exists apart from the five skandhas. If there were any such dharma apart from the five skandhas, by virtue of what characteristics, or what dharmas, would it exist? If you say that the soul is like empty space, separate from the five skandhas yet existent, this is also wrong, and why? We have already refuted empty space in the chapter on refuting the six elements. No dhama called ‘empty space’ exists.
If you assert that a soul exists because belief in it exists, this is not correct, and why? Belief is of four kinds; the first is belief in a manifest thing, the second is belief in something known through this manifest thing as when seeing smoke, we know that there is a fire. The third is belief by analogy as when, in a country with no copper, one uses the example of it being like gold. The fourth is belief in what is taught by saints and sages, as when they say that there are hells, heavens and uttarakuru. Without seeing anything, we believe the words of the holy men and thus know about them.
Such a ‘soul’ cannot be found amongst these beliefs. It is not found in belief in manifest things, nor in inferential belief, and why? Inferential knowledge means that having previously seen something, you thenceforth know (about) this kind of thing, as for example a man who has previously seen that where there is fire there is smoke, subsequently, seeing only smoke, knows that there is fire. The concept of ‘soul’ is not like this, for who could first have seen the soul in the combination of the five skandhas, such that afterwards, seeing the five skandhas, he knows that there is a soul?
Suppose you say that there are three kinds of inferential knowledge, the first being ‘like the original’, the second being ‘like the remainder’, the third ‘seeing together’. ‘Like the original’ means previously having seen that fire has smoke, seeing smoke now, you know that it is like the original which had fire. ‘Like the remainder’ means, for example, that when one grain of rice is cooked, you know that the remaining ones are all cooked. ‘Seeing together’ means, for example, that when you see with your eyes a person going from hereto another place, you also see his going. The sun is like this. It emerges from the east and goes to the west. Although you do not see it going, because a man has the characteristic of going, you know that the sun also has going. In the same way suffering, pleasure, hate, desire, and insight, etc. must also have whatever goes with them. For example, seeing subjects you know that they must rely on some king. But these are all incorrect, and why?
In belief through the characteristic of together-ness, having first seen a person combined with a dharma of ‘going’ who reaches some other place, when you subsequently see the sun reach another place you know that there is the dharma of ‘going’. But there is no prior seeing of the five skandhas combined with a soul, such that subsequently seeing the five skandhas you know that there is a soul. Therefore, no existence of a soul can be established by inferential knowledge of ‘together-ness’.
There is no soul to be found within the teachings of the saints either, and why? In the teaching of the saints, what they first see with their eyes, they subsequently expound. And since the saints teach other things which can be believed, we should know that when they speak of the hells, etc., these can be believed in, but it is not so with the soul, for there is no-one who, having previously seen a soul, subsequently speaks of it.
Therefore, you may seek for a soul within all beliefs such as these four types of belief, but you will not be able to find it. Since you cannot find a soul even though you seek for it, no distinct soul exists separate from the five skandhas.
Further, because of the refutation of seeing, seer and seen in the chapter refuting the six sense faculties, the soul is to be refuted in the same way. For if even an eye seeing coarse dharmas cannot be found, how much less can we find a soul by empty delusions, imagination and so forth? For these reasons, we know that there is no self.
‘Mine’ exists because ‘I’ exists. If there is no I, then there is no mine. Through putting into practice the holy eight-fold path and extinguishing the causes of I and mine, one attains the firm insight of no I and no mine.
Question: Even though non-self is the truth, what is wrong with teaching, merely as a convention, that there is a self?
Reply: Non-self exists by virtue of the negation of the dharma of self. No fixed self can be found, so how could there be non-self? If there were a fixed non-self, then annihilation of if would give rise to attachment and craving. As it says in the Prajñāpāramitā, if a bodhisattva has a self, he cannot act, and if he has no self, he cannot act.
Question: If it teaches neither self nor non-self, neither emptiness nor non-emptiness, what does the Buddha-dharma teach?
Reply: The Buddha teaches the true character of all dharmas, and within that true character there is no path for verbal expressions, for it extinguishes all mental activity. Mind arises because of the characteristic of grasping, exists because of the rewards and retribution of karma in a previous world, and cannot therefore see the true character of dharmas. The Buddha teaches the cessation of mental activities.
Question: Even though an unenlightened person’s mind cannot see the reality, surely a saint’s mind can see the reality? Why does he teach the cessation of all mental activities?
Reply: The true character of dharmas is nirvana, and cessation means nirvana. It is in order to point towards nirvana, that cessation is also termed cessation. If one’s mind were real, what use would be such ways to liberation as emptiness, etc? Why, amongst all the samadhis would the samadhi of cessation be regarded as the highest, and why ultimately reach nirvana without residue?
Therefore we should know that all mental activities are empty deceptions, and as empty deceptions, should cease. The true character of all dharmas surpasses all dharmas of mental phenomena, has no arising and no ceasing, and has the characteristic of calming and extinction solely.
Question: In the sutras it says that all dharmas, having from the beginning the characteristic of calm extinction are themselves nirvana. Why do you say that they are like nirvana?
Reply: Those who are attached to dharmas classify dharmas into two kinds, some being worldly, some being of nirvana. They say that the nirvana dharmas are calm and extinct, but do not say that the worldly dharmas are calm and extinct. In this treatise it is taught that all dharmas are empty in nature and have the characteristic of calm extinction. Since those who are attached to dharmas do not understand this, nirvana is used as an example. Just as with your assertion that the characteristic of nirvana is emptiness, with no characteristics, calm extinction, and no vain thoughts, so it is with all worldly dharmas.
Question: If the Buddhas do not teach self, non-self, and the cessation of all mental activities and the cutting-off of ways of verbal expression, how do they make people understand the real character of dharmas?
Reply: All the Buddhas have unlimited powers of skilful means, and dharmas have no fixed characteristics. In order to save all living beings, they may teach that everything is real, or they may teach that everything is unreal, or that everything is both real and unreal or that everything is neither unreal nor not unreal. If you search for a real nature of dharmas, you will find that they all enter into the ultimate meaning and become equal, with identical characteristics, which is to say no characteristics, just like streams of different colour and different tastes entering into a great ocean of one colour and one taste. At the time when one has not yet penetrated into the true character of dharmas, each one can be contemplated separately as unreal, existing merely by the combinations of conditions. There are three levels of living beings; superior, average and inferior. The superior person sees that the characteristic of dharmas is that they are neither real nor unreal. The average person sees the characteristics of dharmas as either all real, or all unreal. The inferior man, since his powers of perception are limited, sees the characteristics of dharmas as a little real, and a little unreal, regarding nirvana, because it is an inactive dharma and does not perish as real, and regarding samsara, because it is an active dharma, empty and false, as unreal. Neither unreal nor not unreal is taught in order to negate ‘both real and unreal’.
So there's your allegedly nihilist Madhyamaka Buddhism. The simile of the streams entering into the ocean can be taken in a variety of ways, some of which are like the Dao and Brahman -- but this is a Mādhyamika speaking and IMO the most important/characteristic part of the passage is where it is specified that the characteristics of phenomena are identical only so far as the phenomena have no characteristics. This can IMO be extended as a principle to the matter of the colours and tastes in the ocean simile.