The sword was kept hidden in the back of Tatsu's closet for two episodes until it was taken by Lady Shiva.
The sword is of a typical Jian style blade, a common straight sword of ancient China. The entire sword seems to be carved from a single piece of jade.
As the name implies, the sword has the eldritch ability to absorb the soul of those killed by it. The sword was once the property of the League of Assassins. Katana saw, firsthand, that the legends of the sword's powers were true as she witnessed Silver Monkey using the blade to strip the soul from a hapless ninja.
When Katana left the League, she faked her own death in such a way that the League believed her to be dead and the weapon destroyed.
When Silver Monkey attempted to abduct Dr. Jason Burr in the episode "Safe", he discovered both to be untrue. When he returned to the League, he reported that Katana was alive but kept the existence of the sword to himself for reasons of his own, to take down Lady Shiva.
In the episode "Family", Silver Monkey and Dr. Bethanie Ravencroft captured Bruce Wayne in order to ransom him for the Soultaker Sword. However, after Silver Monkey's coup against her failed, Lady Shiva and used the Soultaker Sword to drain the soul of Bethanie and escaped with the weapon.