for some reason kimageformats was not installed on my machine that was converted from KDE5 (only had the KDE 5 variant). Once I installed it, I could see AVIF thumbnails and set them as wallpapers. I just checked the recent package list of https://iso.builds.garudalinux.org/iso/garuda/dr460nized-gaming/240428/garuda-dr460nized-gaming-linux-zen-240428.pkgs.txt and only kimageformats5 was listed in the package list 
Since it is not listed in new package listings, I would make sure you have kimageformats and install it with:
sudo pacman -S kimageformats
I would recommend to update with garuda-update and restart as well as there are many KDE related packages with updates recently.
Edit:
@dr460nf1r3 @FGD
I also see that kimageformats is missing from the latest test ISO build from today as well.