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<h4>Background</h4>The basic idea of tag-based models for cooperation is that individuals recognize each other via arbitrary signals, so-called tags. If there are tags of different colors, then cooperators can always establish new signals of recognition. The resulting "chromodynamics" is a mechanism for the evolution of cooperation. Cooperators use a secret tag until they are discovered by defectors who then destroy cooperation based on this tag. Subsequently, a fraction of the population manages to establish cooperation based on a new tag.<h4>Methodology/principal findings</h4>We derive a mathematical description of stochastic evolutionary dynamics of tag-based cooperation in populations of finite size. Benefit and cost of cooperation are given by b and c. We find that cooperators are more abundant than defectors if b/c > 1+2u/v, where u is the mutation rate changing only the strategy and v is the mutation rate changing strategy and tag. We study specific assumptions for u and v in two genetic models and one cultural model.<h4>Conclusions/significance</h4>In a genetic model, tag-based cooperation only evolves if a gene encodes both strategy and tag. In a cultural model with equal mutation rates between all possible phenotypes (tags and behaviors), the crucial condition is b/c > (K+1)/(K-1), where K is the number of tags. A larger number of tags requires a smaller benefit-to-cost ratio. In the limit of many different tags, the condition for cooperators to have a higher average abundance than defectors becomes b > c.