Lab VO2 max testing is typically done as a graded exercise test: you wear a breathing mask while walking, running on a treadmill, or cycling as the workload steadily increases until you reach near-maximal effort. The equipment measures the oxygen you inhale and the carbon dioxide you exhale, then reports peak oxygen consumption usually in milliliters per kilogram of body weight per minute (mL/kg/min). Fitness watches can estimate VO2 max from heart-rate and workout data, but a supervised lab test is still considered the more accurate method.
Source: Mayo Clinic News Network — VO2 max and overall fitness