I'm having this same exact problem and can't find any information on how to get around this. Did you figure anything out?
i dont know why but i kept having the same problem, especially when trying to load the pic off the internet or an sd card. its like windows has trouble adjusting it if its not saved onto your hard drive. so make sure its saved in a good spot, then add to wallpaper from the actual image itself, not windows photo viewer. THEN try changing it to fit or stretch or whatever you want and it SHOULD work.