Identity signals are those common components of communication transmissions that inform receivers of the signaler's membership in a categorizable subset of individuals. Such signals may be overt, broadcast to all possible receivers, or covert, encrypted so that only similar receivers are likely to perceive their identity-relevant meaning. Here we present an instrumental theory of covert signaling, based on the function of identity signals in social assortment. We argue that covert signaling is favored when signalers are generous toward strangers, when costs of being discovered as dissimilar are high, and when the ability to assort only with preferred partners is restricted. We further argue that covert signaling should be more common among members of "invisible" minorities, who are less likely to encounter similar individuals by chance. We formalize this theory with an evolutionary model to more rigorously explore the consequences of our assumptions. Our results have implications for our understanding of numerous aspects of social life, including communication, cooperation, social identity, humor, pragmatics, politics, hate speech, and the maintenance of diversity. (PsycInfo Database Record (c) 2022 APA, all rights reserved).