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A growing body of research, led by system-involved individuals, is taking a deeper look into race making and “gang” identities in correctional settings. Scholars have relied on various methods (e.g., interviews with justice involved persons and their own lived experiences) to identify processes responsible for individual and group identities. In doing so, this work has excluded broader community processes that organize and stratify groups. We extend this important work by highlighting the relationship between social inequality, crime, and justice system contact in shaping identity development. Specifically, we discuss the heterogeneity across and within cultural groups’ adaptation to social inequality in communities and prisons. We discuss the interdependence among marginalized groups in communities and how it can shape both group conflicts and cooperation in economic markets. We argue these social processes are central to understanding racial identities in carceral settings and “gangs” in the community and behind prison walls. We conclude the paper by presenting the implications for policy and future research.