Here is the official Canvas documentation:
How do I embed an image in a discussion reply as a student?
Here's a more direct set of steps If you have a picture file on your computer that you'd like to upload into a discussion reply:
- Click Reply in the discussion
- Click the image icon (looks like a mountain) to upload an image from your computer  
- If you wanted to use an image from your Canvas account files click on the arrow next to the image icon to display the following menu. A window will open. In that window browse to and select the picture file.   
- Once you've selected the picture file, click on the image in the rich content editor, select "Image Options" and from there you'll be able to type a description in the Alt text box (you can also adjust the image size), then click Update: 
- Make other changes to your discussion post as needed, then click "Post Reply". 
