Earlier quoted context omitted.
What makes you think they log IP addresses?
Under GDPR any kind of data processing falls under the protection umbrella. And that includes the data processing that automatically happens during the creation of a TCP/IP connection - where the recipient party automatically gains knowledge of the IP address of the other side. For a web site itself this is generally fine as it is a technical necessity and intended by the user... however stuff that is not necessary t…
If processing IPs always required consent, every website, app, and operating system would have to come with a cookie banner. Instead, processing IPs falls under the "required to make things work" banner. I'm sure VSCode processes your IP address for many things such as installing extensions and updates and nobody is arguing they need consent for those.
This particular case is complicated since it's telemetry, however, they are gathering non-identifying data.
I suspect this is currently a grey area of the GDPR which would take a lot of money and lawyer time to work out. In the meantime, MS (and many others) are taking the point of view that this non-identifying data gathering is important for the work of making the software better and therefore doesn't require consent. Personally, that seems reasonable. None of my actual identifying data is being collected, so this matches the spirit of the law at least, if not the letter.