Over the last decade, Fe₂Mo₃O₈ has attracted intensive attention due to its giant magnetoelectricity effect which is a consequence of the field dependent magnetic ground state (antiferromagnetic versus ferrimagnetic). However, the microscopic mechanism of magnetoelectricity is currently highly debated. To shed new light in this direction, we have investigated the electronic and magnetic properties of Fe₂Mo₃O₈ by element-selective X-ray absorption spectroscopy (XAS) and X-ray magnetic circular dichroism spectroscopy (XMCD). Our measurements show that the iron ions in both octahedral and tetrahedral sites are in the Fe²⁺ configuration, which agrees with first principle calculations. XMCD measurements at Fe-L_2,3 and Mo-L_2,3 edges respectively reveal large magnetic moments at the Fe²⁺ sites and no net-moment on the Mo sites. Full-multiplet calculations of XMCD and crystal field theory show the existence of large spin (~3.5m_B) and orbital (~1m_B) moments for Fe²⁺ ions at both sites and in both magnetic phases, with the total magnetic moment larger on the octahedral site. The existence of large orbital moments implies the importance of the interplay between the spin-orbit coupling, the structural distortions, and the magnetic field to the microscopic mechanism of magnetoelectricity.