Continuous estimates of streamflow are challenging in ephemeral channels. The extremely transient nature of ephemeral streamflows results in shifting channel geometry and degradation in the calibration of streamflow stations. Earlier work suggests that analysis of streambed temperature profiles is a promising technique for estimating streamflow patterns in ephemeral channels. The present work provides a detailed examination of the basis for using heat as a tracer of stream/groundwater exchanges, followed by a description of an appropriate heat and water transport simulation code for ephemeral channels, as well as discussion of several types of temperature analysis techniques to determine streambed percolation rates. Temperature‐based percolation rates for three ephemeral stream sites are compared with available surface water estimates of channel loss for these sites. These results are combined with published results to develop conclusions regarding the accuracy of using vertical temperature profiles in estimating channel losses. Comparisons of temperature‐based streambed percolation rates with surface water‐based channel losses indicate that percolation rates represented 30% to 50% of the total channel loss. The difference is reasonable since channel losses include both vertical and nonvertical component of channel loss as well as potential evapotranspiration losses. The most significant advantage of the use of sediment‐temperature profiles is their robust and continuous nature, leading to a long‐term record of the timing and duration of channel losses and continuous estimates of streambed percolation. The primary disadvantage is that temperature profiles represent the continuous percolation rate at a single point in an ephemeral channel rather than an average seepage loss from the entire channel.