From TM Wiki

An avatar is a small icon which represents you when you are online.

Supported avatar formats are .jpg, .dds (Direct Draw Surface) and .bik (for Animated Avatars). All avatars must be 128x128 pixels in dimension, and size is restricted to eight (for static images) or sixteen (for animations) kilobytes.

To install an avatar, place the avatar in the GameData\Skins\Avatars\ folder. To select the avatar, launch the game and go to 'Profile'. Select the avatar by clicking on it.