Late answer, but I just ran into the same issue. I resolved it by switching the audio driver.
My exact situation: I needed to record some sounds I made on an external piece of hardware (M8) that supports Audio/MIDI-via-USB. In order to save myself the cables to record the output via my main interface, I switched over to an ASIO-driver that allows selecting different input- and output devices, allowing me to select the M8 as an input and my interface as an output (for monitoring). This works great for recording, but then I bumped into the issue described above, with S1 being muted in the windows audio mixer. "Release audio device in background" also didn't work.
When I switched back to the main driver for my interface, everything went back to normal.
Tried to test this behaviour with ASIO4all as well, and here it's the other way around - I always hear my DAW playback, but I can't get the sound from the video to play.