Under new terms of service, which come into effect on January 16, users grant the company a ''non-exclusive, fully paid and royalty free, transferable, sub-licensable, worldwide licence to use the content that you post on or through the service''.
Geoff Holland, the secretary of Electronic Frontiers Australia, said this meant that while ownership of the photo stayed with the person who took it, the company had a licence to use the image any way it liked.
"It is not our intention to sell your photos" ... Kevin Systrom.
It brings Instagram into line with other networking sites like LinkedIn and Facebook, which bought Instagram for $1 billion in April, and has a similar policy.
Dr Melissa de Zwart, an associate law professor at the University of Adelaide, said the photo subjects could potentially end up in advertising on billboards.
''You are giving them a blanket licence to do with it what they want,'' she said. ''We are in a bit of a bind because this is how we communicate, how we share information.''
The only option, she said, was to delete your account. A number of celebrities did just that. The singer Pink tweeted: ''I will be quitting instagram today. what a bummer. you should all read their new rules.''
''Instead it was interpreted by many that we were going to sell your photos to others without any compensation,'' Mr Systrom wrote. ''This is not true and it is our mistake that this language is confusing. It is not our intention to sell your photos. We are working on updated language in the terms to make sure this is clear."
Mr Holland said because there was generally no right to privacy in Australia the only legal restriction on Instagram or Facebook using people's photos were if it painted them in a poor light, prompting a defamation claim.