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I'm able to confirm the issue here on XenForo Community. And this is working as it should on KH-Flare, which is still on XenForo 1.5.5, so I'm guessing this bug cropped up somewhere between XenForo 1.5.6 and XenForo 1.5.9. It could be similar to that Gravatar bug I reported a long time ago, which has since been fixed, but I'm not sure.

There's also another issue that, after you attempt you upload a local avatar, the Okay button doesn't work, though the Cancel button still does.

Here are the steps to reproduce this:

1. Open the Avatar Editor overlay
2. Select Upload new custom avatar if it is not already selected
3. Click on Choose File and choose an avatar of your choice
4. Notice the current avatar does not change
5. Okay button now does not work

If it's of use, I'm on Windows 10 using Chrome.