diff --git a/codeflash/languages/javascript/support.py b/codeflash/languages/javascript/support.py
index b9037b939..4cc0d496a 100644
--- a/codeflash/languages/javascript/support.py
+++ b/codeflash/languages/javascript/support.py
@@ -160,9 +160,15 @@ def discover_functions(
                 if not criteria.include_async and func.is_async:
                     continue
 
+                # Skip nested functions (functions defined inside other functions)
+                # Nested functions depend on closure variables from parent scope and cannot
+                # be optimized in isolation without complex context extraction
+                if func.parent_function:
+                    logger.debug(f"Skipping nested function: {func.name} (parent: {func.parent_function})")  # noqa: G004
+                    continue
+
                 # Skip non-exported functions (can't be imported in tests)
-                # Exception: nested functions and methods are allowed if their parent is exported
-                if criteria.require_export and not func.is_exported and not func.parent_function:
+                if criteria.require_export and not func.is_exported:
                     logger.debug(f"Skipping non-exported function: {func.name}")  # noqa: G004
                     continue
 
diff --git a/tests/languages/javascript/test_discover_functions.py b/tests/languages/javascript/test_discover_functions.py
new file mode 100644
index 000000000..c0c5d2d37
--- /dev/null
+++ b/tests/languages/javascript/test_discover_functions.py
@@ -0,0 +1,117 @@
+"""Tests for JavaScript/TypeScript function discovery logic."""
+
+from __future__ import annotations
+
+from pathlib import Path
+
+import pytest
+
+from codeflash.languages.base import FunctionFilterCriteria
+from codeflash.languages.javascript.support import JavaScriptSupport
+
+
+class TestFunctionDiscovery:
+    """Tests for discover_functions method."""
+
+    @pytest.fixture
+    def js_support(self) -> JavaScriptSupport:
+        """Create a JavaScriptSupport instance."""
+        return JavaScriptSupport()
+
+    def test_discovers_top_level_function(self, js_support: JavaScriptSupport) -> None:
+        """Should discover top-level exported functions."""
+        code = """
+export function topLevelFunc() {
+    return 42;
+}
+"""
+        functions = js_support.discover_functions(
+            code,
+            Path("/tmp/test.js"),
+            FunctionFilterCriteria(require_export=True, require_return=True),
+        )
+
+        assert len(functions) == 1
+        assert functions[0].function_name == "topLevelFunc"
+        assert functions[0].parents == []
+
+    def test_skips_nested_functions_in_closures(self, js_support: JavaScriptSupport) -> None:
+        """Should skip nested functions that are defined inside other functions.
+
+        Nested functions depend on closure variables from their parent scope and cannot
+        be optimized in isolation without extracting the entire parent context.
+
+        Bug: Previously, nested functions were discovered and attempted to be optimized,
+        but the extraction logic only captured the nested function body, causing
+        validation errors like "Undefined variable(s): base, streamFn, record".
+        """
+        code = """
+export function wrapStreamFn(streamFn) {
+    const base = { id: 1 };
+    const record = (event) => { };
+
+    const wrapped = (model, context, options) => {
+        if (!model) {
+            return streamFn(model, context, options);
+        }
+        record({ data: base });
+        return base;
+    };
+
+    return wrapped;
+}
+"""
+        functions = js_support.discover_functions(
+            code,
+            Path("/tmp/test.js"),
+            FunctionFilterCriteria(require_export=True, require_return=True),
+        )
+
+        # Should only discover the top-level function, not the nested ones
+        assert len(functions) == 1, f"Expected 1 function but found {len(functions)}: {[f.function_name for f in functions]}"
+        assert functions[0].function_name == "wrapStreamFn"
+        assert functions[0].parents == []
+
+    def test_discovers_class_methods(self, js_support: JavaScriptSupport) -> None:
+        """Should discover class methods (these are handled specially with class wrapping)."""
+        code = """
+export class MyClass {
+    myMethod() {
+        return 42;
+    }
+}
+"""
+        functions = js_support.discover_functions(
+            code,
+            Path("/tmp/test.js"),
+            FunctionFilterCriteria(require_export=True, require_return=True, include_methods=True),
+        )
+
+        assert len(functions) == 1
+        assert functions[0].function_name == "myMethod"
+        assert len(functions[0].parents) == 1
+        assert functions[0].parents[0].name == "MyClass"
+        assert functions[0].parents[0].type == "ClassDef"
+
+    def test_skips_nested_functions_with_multiple_levels(self, js_support: JavaScriptSupport) -> None:
+        """Should skip deeply nested functions."""
+        code = """
+export function outer() {
+    const middle = () => {
+        const inner = () => {
+            return 42;
+        };
+        return inner();
+    };
+    return middle();
+}
+"""
+        functions = js_support.discover_functions(
+            code,
+            Path("/tmp/test.js"),
+            FunctionFilterCriteria(require_export=True, require_return=True),
+        )
+
+        # Should only discover the top-level function
+        assert len(functions) == 1
+        assert functions[0].function_name == "outer"