Version: (using KDE 4.2.0) Installed from: Gentoo Packages → Systemsettings → About Me → Password & User Account → Click to change your image → Custom Image → Select a non-local image → Enable the option 'Save copy in custom faces folder for future use' → Click 'Open' → A message telling you 'You can only select local files' appears When the option 'Save copy in custom faces folder for future use' is enabled it should be possible to select also remote images.
Starting with Plasma 5.4 kcm_useraccount has been deprecated in favor of user-manager (you can run with kcmshell5 user_manager). This means that unfortunately we did not get to fix your bug, sorry about that. We encourage you to try user-manager and report any bug or improvement you may find. Sorry again for not fixing your bug and thanks for caring about KDE :)
Re-openened + re-assigned product/component, as this applies also to user-manager.
This is fixed in the Plasma 5.20 rewrite. You can enter a URL right into the name field of the Open dialog and the image will be downloaded and used as the avatar, just as you would expect. Pretty nifty.