The photo cannot be set as the background if the resolution is the same as the display resolution and the size exceeds ~2000 kB. If the resolution is different from the display resolution, the photo will be scaled automatically and there is no issue.
The same photo works just fine when you do some cropping while selecting it as background. The assumption is that the size of the newly converted image is less than ~2000KB.
- Select Settings > lock screen.
- Under Background, tap the list and select photo > change photo.
- Choose the photo from the gallery.
- Pinch with your fingers to zoom in and out, then tap crop.