Upload it into "my pictures". This can be found by clicking the words "my stuff" on the side of your screen.
Click the button that says "upload new picture" and select the picture you want to upload.
Put in a title you'll remember (or don't) then hit "choose file" near the bottom of the screen. Then click the blue "upload new picture" button that's at the very bottom of the screen. The maximum size for a picture is 100,000 bytes, and it can't be wider than 550 pixels or higher than 600 pixels.
When going to put it in the story, you click the little icon that looks like a photo, then choose the photo you want.