Avatars can be up to 100x100 pixels in dimension, and up to 30k in file size (which is plenty for such a small image). They should be in the JPEG or GIF file formats.
Avatars can be uploaded to the server via your user control panel (go to the UserCP link where you can also set your titles, signatures etc). You can either upload an avatar via a web link or from browsing a file on your hard drive.
If you've found an existing avatar image on another forum you'd like to use, either use the URL of the image to upload it to this site, or save it to your hard drive and upload it that way. Lots of web forums like VN Boards have a wide range or generic avatars you could select from and as long as the image isn't bigger than 100x100 you'll be able to use it here.
But it's probably more fun to make your own.
If you want to make your own avatar by editing a screenie or resizing / cropping an existing image or photo, you'll need some image editing software. See
this sticky for suggestions.
By way of example, I made my avatar for this site by taking a screenie of my character, opening the screenie in some image editing software, cropping the area I wanted with a square shaped crop, resizing the crop to 100x100 size and then saving as a medium-high quality JPEG.