Just be yourself.  Don't set up any special situation or anything that is any different than what would normally take place between the two of you. You're going to be nervous enough as it is......no need to add any more baggage to that. 
Like I said, be yourself. If you know the guy well enough and you think of him as a best friend, then you should be able to come out with this and just tell him what's going through your mind. 
First though, stick to the guy on guy issue. Get that out there and in the open and get it discussed. Tell him how you feel, ask him how he feels, what he thinks.  Once you understand what he thinks about the matter itself, then you can take the next step and get a little deeper. 
As has been said, don't just come out and tell him you're in love with him or that you want to have sex with him. I mean get a vibe going before you blow his gaskets and stuff, ya know? We all think we know people and are certain how they will handle things ........and we go tell somebody something and then BAM! we were totally wrong about how we thought they would react. Never assume ANYTHING. 
So in order to not assume, you have to get the facts out there and get it all on the table and then you can see where to go from there. 
I think the first thing I would do would be to tell him I wanted to talk to him about something that's very personal to me and very serious to me, and ask him if could take the time to listen and not judge, but listen to what I have to say...... and then see how things go from there. 
Once you've got his attention and you're finally comfortable at having gotten it out there, ask him what he thinks and how he feels and if he has any questions. 
As for the gay tag....dude, there are a lot of guys out there who are just curious, and some who really are homosexual but don't want that name or label to be applied to them.....and they may never act on it the way some other guys would.  So don't just assume because he got wood while wrestling with you, that he's "Gay"...maybe he's just a horny dude and he got wood, period. 
One of the dudes I hang with, I always have wanted him.....we'd do all kinds of stuff together......from laying on the sofa together almost in a spoon kinda thing watching a video, to jerking off in the same room, but not looking at each other while doing it.  I'd be jerking off under the blanket sittin on the couch watching porn while he sat outside of the blanket 4 feet down from me and did nothing, but he knew what I was doing.....
Showing each other our junk out in public or like when working on the car and pulling your stuff out through the leg of your shorts and then hollering out his name so he'd look and then he'd laugh at me and turn away real fast like he didn't want to see my stuff and then he'd go OH DUDE I DIDNT NEED TO SEE THAT, YA FREAK!!! And it was all just fun....sure I wanted him to see, and I think he wanted to see....but it was nothing pressured. Just a couple of guys being guys.....
We've even touched each other through our shorts just play wrestlin in the floor...both hard as diamonds...but never has it progressed to actually anything happening or actual skin on skin. Yeah, we've shown our hard-ons to each other and compared them even, but never touched. 
It went on long enough and it was making me kinda crazy so I just asked him, literally I said , Dude, do you wanna take this one step further and fuck around a little?  and he said nah, that it was too weird...like to kiss a dude or touch another dude....so I never pushed it beyond that. I was happy to just be goofy and have the fun we were having. He moved away to go to school and he's got a serious girl now, but I don't know what that means. I mean I haven't asked him because I sensed if he really wanted to do something with a guy, it would have been me and he would have let it happen. He's nowhere near as touchy feely or as close to any of our other male friends as he is with me. 
Sure I could have just finally moved on him and cornered him and pulled his cock out of his shorts and did a whole boys gone wild thing on him.....but what if I did that, after he had already told me that the guy on guy thing was too weird to him, and he freaked and then I lost him as a friend? It's not worth that to me and after all,  I was the one who initiated most of the stuff and brought it up and finally asked him.....not the other way around.  I respect him enough as a friend to not put pressure on him about something he's said he wasn't interested in taking to that level. Sure, if he ever does come around, I'll be happy to have sex, suck his cock, fuck until our nuts bust, if that's what he wants....but not until he says, OK.  
So there are many ways things can play out ya know? You just have to take it easy, be gentle and be prepared that you may NOT get the answer you want....and if that is the case, then be glad you have this guy as a friend, respect his wishes and move on with your life. Do not get mad, or depressed or start distancing yourself from him if he isn't on the same level as you are and he says it's not his game...... just be his friend and be content in that fact. 
Sure, I wish you the best and I hope that he tells you "DUDE! I've been praying for the day you'd finally tell me this!!!!" And then the two of you go off and fuck each other crazy......but life is not always as easy as a gay porn story. 
Good luck bro!  ALL the best on your adventure. 
Hope this wasn't too long.