There are two ways to set the profile picture, you will have to use a third part hosting service, see the information steemit provided below. The other option would be to just make a steemit post and upload the picture with it. Once you submit your post you can go to the post and right click on the photo and click copy image location. once you copy the image location the url for the photo can be pasted in to the Avatar URL section of your profile settings. Hope this helps. The below information is from steemit FAQ page.

How do I change my avatar image and other profile information?

Your profile info, avatar image, and cover image are set in your Settings page. In order to update your avatar picture and cover image, you will need to host the images somewhere. This can be done by uploading it to a Steemit comment or post, or using a third-party image host such as Postimage. Once your image is uploaded, copy its URL and paste it into the "Profile Picture URL" box for the avatar, or the "Cover Image URL" box for the cover image. Then click the Update button and enter your password or active key.