Seems my initial intuition about this was wrong, but this has actually been answered here: How does the paste image from clipboard functionality work in Gmail and Google Chrome 12+?
For online images, google actually uses a reference to the original images http location. For images pasted locally, google uploads the image onto its own (cache) server and then sends the [img src '' /] pointing to that.
Yikes! Scary stuff, eh? Better not leave any confidential information in your clipboard (image, passwords, etc). and then unmindfully paste into a website that may be sniffing