Yes, it is possible, but @peternlewis does not recommend it.
If you paste a custom image into the image well of the Macro, it will consume many times the amount of space over the Image Chooser in the Macro plist file.
One or two won't matter that much, but users who have used custom images for many macro have noticed a slowdown.
Good to know. Thank you!
I know this is not recommended as I asked on the Forum about this before. But I have to say that in my usage I have noticed no slowdown. The advantage of custom icons in my palettes makes them so much easier to use that I have persevered using my custom icons with the thought that I can easily delete them if I ever run into problems. Like I said, so far after lots of use of Keyboard Maestro I haven't noticed any performance issues.
Interestingly @peternlewis replied to a previous post of mine saying if there was any performance issue it would affect the Keyboard Maestro Editor's performance, not the Keyboard Maestro Engines's performance.
As a quick example of how much clearer custom icons make palettes here is a Palette with custom icons:
And here is the same Palette with the default Keyboard Maestro icons:
Correct - where you will potentially notice an issue is in the editor if the Keyboard Maestro Macros.plist file starts getting very large.
It is unlikely to effect the Engine performance while the macros are not changing.
Hi @Zabobon & @peternlewis, I have equipped all my macros (and there are quite a few 
) with individual items for better illustration.
I can't see any deterioration or delay of KM.
It should be pointed out that the Icon Chooser offers a lot of options and customization:
Another take on this is to use just text for the image or a mix of text and image for the image. Here is a Mail palette using a mix of images and text as images:
And a Finder window with the macros imbedded in the window's Toolbar:
Also to note is that on a tech support call with an Apple Senior Tech, I was advised to use 1024x1024 for icons or one of the other lower resolutions like 512X512 to avoid potential errors and I've been changing the image type to "icns" before dropping it into the image well. Changing to icns has the added advantage of displaying the icon image as the final icon in a Finder list view with the background displayed correctly if it has a transparent background which I think looks cleaner.
Yes, as @JMichaelTX says, the Icon Chooser allows lots of customisation. And I do use Keyboard Maestro's Icon Chooser when I want to use an App icon. Like say, for Photoshop . Or if I just want a letter or standard symbol.
What I'm curious about (and maybe @peternlewis could answer?) is if it makes any difference if I use the Icon Chooser to add Photoshop's icon to a palette rather than grabbing that icon and pasting it into the Macro's image well (assuming the icon I'm pasting in is quite small).
Ever since I started using Macs I've loved the ability to change an icon for a folder or file on the Mac by just invoking its Get Info window and pasting a new icon into the icon well in that window. So, doing that in Keyboard Maestro feels natural to me. It also allows me to make my own icons and use those.
I like to use PNG files for my own custom icons and agree with @BernSh that it looks better to have icons with transparency.
I also have a "blank" icon which is just a small PNG with no image but transparent background for when I don't want to have any icon - to make a gap in the palette. I find this makes the Palettes easier to read.
Here is the PNG image file I use for that:
Blank.png.zip (1.8 KB)
I haven't managed to find any way to use Keyboard Maestro's inbuilt Icon Chooser to make a "blank icon". I wonder if that is possible?
Hi @Zabobon, I regularly use large PNG images (Internet or Affinity) to better display my macros.
I don't have to care about the size of the image, because KM converts it to its own size (64 x 64).
Here is an example:
Do you already know this KM plugin from @DanThomas?
It is indispensable to organize the pallets. Give it a try.
Wow! That is great to know. I won't worry from now on 
︎
Yes and I use it all the time.
Yes. If you choose it from the Icon Chooser, Keyboard Maestro will record just the bundle ID. If you paste in an image, Keyboard Maestro will record the entire image.
You can make a blank icon with the Icon Choose just by adjusting the character transparency to 0.
Great. And can I copy and paste this "blank" icon into the image wells of other macros? Or will that create an image rather than the bundle ID?
Hi @Zabobon, unfortunately the name of the first action will always appear in the macro or you have to assign an individual name.
But if you can live with a very small dot, I have something for you.
I have created a template macro for myself:
~:Desktop. <0302 200904T213022>kmmacros.kmmacros (1,1 KB)
I have inserted the template macro itself into an AppleScript that I can call from my KM palette:
24)Blank Item <669F 200904T213108>.kmmacros (31,5 KB)
Now I just have to activate the macro group (here Finder - blue background) and then call my macro with the AppleScript and I have a blank placeholder with a very small dot 
Maybe this will help you...
Thank you @appleianer that is very interesting. I was actually just trying to simplify making a blank icon for an existing Macro rather than a placeholder with a blank icon.
But one improvement I could suggest to you for you blank placeholder. You do not need the small dot. You can just type a "space" after the 03)
Then you get a completely blank placeholder without even a dot.
So instead of naming the Macro with a dot:
Just replace the dot with a space:
Then instead of this:
You get this:
What is neat about this is that the "space" naturally leads to the blank placeholder being alphabetically listed above all the other Macros with the same number:
So, it is easy to put the blank gaps where they are needed in the Palette.
Taking onboard your system @appleianer I have tidied up my Finder Palette with gaps between my categories of Macros which makes it even easier to read at a glance. Thank you very much for suggesting this.
Unfortunately, copy & paste of any icon will generate an image.
Instead, double click the source icon, which will open the Icon Chooser with that icon, then select the destination icon and click the icon in the icon chooser to set it.
Is it possible for you to change KM's behavior in doing this, so that KM puts the path to the icon on the clipboard, and then when it is pasted you read the path on the clipboard?
IOW, put private flavors on the Clipboard to use, like many apps do.
I think this would be a huge productivity improvement. In fact, while you're there, if you want to really help us out, go the next step: Copy the path of the selected macro image, and then let us select multiple macros and paste the path into the selection.
I'm still unclear on how to insert a custom image via the icon chooser? If dragging a PNG is not advisable?
Where is the upload feature?
