When using "That's" or "It'" in this sentence is more about the context of the conversation.
Scenario: Using "That's" The sentence is open ended, (That's or That is)
You: I see that you play the piano
Me: Yes, I do. I have been playing the piano since I was 5.
You: That's so cool!
Scenario 2: Using "It's", describing the piano (It's or It is)
You: I see you play the piano, It's so cool.
This "It's or It is" is now describing that the piano; which is an object is cool
So you think the piano is cool when you use it's.