iCloud doesn't really have editing tools. iCloud is a synchronization service that makes files available on all your devices, and that's where you do the editing, etc.
I can see my pictures in iCloud Photos, and I can do a little with them, but I can't edit them there. You can look at many of the files in iCloud Drive, but you can't edit them.
iCloud Drive is a folder on your Mac that has all the files in it that you see in iCloud Drive at iCloud.com. All those files are local to the Mac, and that's where you edit them.
If you have "Optimize Mac Storage" turned on, then when your Mac's hard drive gets really full, some lesser used files will be removed to make room. When you need one of those removed files, the Mac will grab the copy at iCloud.com and copy it to your Mac where it will again become a local file. You always use local files. This should all happen transparently. Perhaps the biggest downside of "Optimize" is that backups may not include all your files. I don't do "Optimize" on my Mac, though I use it on my iPhone which has way less storage. To keep the room I need on my MacBook, I put stuff on a tiny (like 1 ounce) SSD that I carry around. I try to keep 20% of my internal drive free.
Do you have "Optimize" turned on in you Mac?