A method for detecting parasitic power circulation within a work vehicle may include controlling an operation of the work vehicle such that a transmission of the work vehicle has a first output speed and determining a first power value associated with power transmitted through a drive shaft of the work vehicle at the first output speed. The method may also include adjusting the operation of the work vehicle such that the transmission has a second output speed that differs from the first output speed and determining a second power value associated with power transmitted through the drive shaft at the second output speed. In addition, the method may include comparing the first and second power values to a predetermined relationship to determine whether the work vehicle is currently experiencing parasitic power circulation, wherein the predetermined relationship is associated with operation of the work vehicle without parasitic power circulation.