The species was first formally described as a new to science in 1936 by American mycologist Herbert Spencer Jennings, as a member of genus Hygrophorus.

The type specimen was collected by George M. Sutton from Southampton Island in 1930, where he found them growing in the brown peaty parts of the moss Dicranum fuscescens.

[2] Lichenomphalia hudsoniana is one of the most common and widely distributed members of its genus, and can use a variety of substrates for growth.

It occurs in Asia, Europe, and North America, largely in alpine and arctic regions, but is also known from areas near the ocean in Norway and Great Britain.

The preferred habitat for this basidiolichen is damp soil amongst mosses, and in bogs; less frequently it is recorded growing on decaying tree bark in shaded areas.