This is very old topic and is possible you don't get an answer anytime soon. I will answer and trying to be helpful. I have Fiio X5 1 gen, not the second.
Does the EQ function while using coax - yes, it does. For files up go 48 000hz sample rate. Above that can't apply EQ.
I am not sure about the gain, i would say no, it does not work using coax output as it needs the amplifier section of the device to be active, and it is not active using coaxial. But, if you use EQ it will lower the volume with 6 db to avoid clipping. This may have same effect as GAIN to your ears when you turn on or off the EQ (lowers the entire volume 6db when on), but is actually not GAIN.
Is everything bypassed using coaxial - yes, so long as you do not use EQ. The DAC chip is not active and the amplifier circuit is not active as well. If you use EQ it will process the changes through the CPU and send the changed signals through the coaxial output. Is not a problem, just saying if you use EQ there will always be changes and processing.
That said, keep in mind the DAC chip used in Fiio X5 series is Texas Instruments 1792a, or also called Burr Brown 1792a. This is depending on your preference and arguably better than what is inside Magni/Heresy stack. If you want to test it, use the line out and not coaxial out - it will then use the 1792a DAC in the Fiio instead of your external one. You can tell if the Fiio's DAC chip is active by looking at the battery consumption (if the dac chip is active, the amplifier circuit will be as well). If it is active the battery life is 12-15 hours (or less). When not active (when using the coaxial output), it should be 25+hours battery life. Also the device is warm on touch when dac chip and amp circuit are active.
If you use the line out of the Fiio, it will use its DAC chip. If you use coaxial output, it will use the Magni/Heresy stack DAC chip. Hope that helps somewhat.
